The fight against the novel coronavirus sparked serious upside for an array of healthcare assets this year, including biotech-focused exchange traded funds. Point in case, the widely followed Nasdaq Biotechnology Index is higher by 11.50% year-to-date.
Some biotechnology ETFs are performing better than that, partly due to heavier allocations in the likes of Moderna (NASDAQ:MRNA), BioNTech (NASDAQ:BNTX) and Inovio Pharmaceuticals (NASDAQ:INO), among other Covid-19 vaccine competitors.
Beyond Covid-19, investors are drawn to biotech because this is one of the most innovative corners of the broader healthcare sector, and that innovation fuels big growth. Per Morningstar:
“We project 4.7% annual average sales growth through 2024 (similar to consensus) for the 18 moatiest pharma and biotech names we cover, as innovation more than counters generic/biosimilar and branded competitive threats.”
Investors looking to profit from that growth should consider these 7 biotech ETFs to buy now for Covid-19 and beyond:
- SPDR S&P Biotech ETF (NYSEARCA:XBI)
- ARK Genomic Revolution ETF (CBOE:ARKG)
- ALPS Medical Breakthroughs ETF (NYSEARCA:SBIO)
- Principal Healthcare Innovators Index ETF (NASDAQ:BTEC)
- First Trust NYSE Arca Biotechnology Index Fund (NYSEARCA:FBT)
- Loncar Cancer Immunotherapy ETF (NASDAQ:CNCR)
- ETFMG Treatments, Testing and Advancements ETF (NYSEARCA:GERM)
Biotech ETFs to Buy: SPDR S&P Biotech ETF (XBI)
Expense ratio: 0.35% per year, or $35 on a $10,000 investment
TheSPDR S&P Biotech ETF is one of the legacy funds in the biotech ETF category, and one of the largest at that. Up about 15% year-to-date, it’s again displaying the advantages of its equal-weight methodology, which tilts the fund toward smaller and mid-cap stocks. Compare this to the aforementioned Nasdaq Biotechnology Index, which is cap-weighted and leans heavily on large-cap stocks.
XBI holds 113 stocks with a weighted average market capitalization of $10.33 billion, put the fund in mid-cap territory. More relevant to the current environment, XBI is a credible coronavirus play as at least four of its top 10 holdings, including Inovio and Moderna, are working on Covid-19 vaccines. Plus, there’s earnings growth to be had here.
“In the wake of massive downside growth for the broader market, as shown above, 2020 earnings growth is projected to remain positive for biotech relative to the S&P 500 (1% vs. -20.5%) with the 3–5-year outlook nearly double the market rate (19% vs. 10%),” according to State Street Global Advisors.
ARK Genomic Revolution ETF (ARKG)
Expense ratio: 0.75% per year
It’s easy to get wrapped up in the 60.20% 2020 gain posted by the ARK Genomic Revolution ETF and say this is the ultimate ETF for a coronavirus play. However, that would diminish an important fact: ARKG has been trouncing traditional healthcare and biotech ETFs for years, long before Covid-19 was part of the everyday lexicon.
Yes, there are intersections between genomics and the quest to vanquish the virus and yes, some ARKG components are engaged in that fight. However, the fact of the matter is genomics is a booming industry with or without a pandemic and ARKG is one of the biotech ETFs best positioned to thrive after the coronavirus is defeated.
“Over the last five years, we have passed key inflection points in the ability to access, manipulate, and understand the molecular building blocks of the human body,” writes ARK Director of Research Brett Winton. “The ‘genomic age’ of medicine promises profound ramifications for human health and for the companies involved, among them: (i) tool providers that enable basic research, sharpen the precision of diagnostics, and guide personalized medicine; (ii) diagnostic platforms deploying data that informs the treatment of disease; (iii) and other companies deploying technology and data to create next-generation treatments and cures.”
The fund is actively managed, hence the high fee relative to rivals, but ARKG has proved it’s worth paying up for.
ALPS Medical Breakthroughs ETF (SBIO)
Expense ratio: 0.50% per year
The ALPS Medical Breakthroughs ETF isn’t heavy on coronavirus fighters, but it’s highly relevant in the current biotech environment and beyond. The pandemic is placing added emphasis on later stage clinical trials — good for SBIO as all of its components have drugs or therapies that are in Phase 2 or Phase 3 trials.
Likewise, smaller biotech companies continue flourishing. That’s a positive for SBIO as its components have market caps ranging from $200 million to $5 billion. One more relevant trait offered by SBIO: its member firms must have enough cash to survive at least 24 months at current burn rates. That’s important because developing a novel drug or treatment comes with steep costs.
About 10% of SBIO components are working on COVID-19 solutions. That’s enough to keep things interesting with this biotech ETF over the near-term, but the fund offers long-ranging potential due in large part to its immunotherapy and oncology holdings, among others.
Principal Healthcare Innovators Index ETF (BTEC)
Expense ratio: 0.42% per year
The Principal Healthcare Innovators Index ETF recently turned four years old. It was toiling in relative anonymity until the coronavirus came around. Now, BTEC ranks as one of this year’s best-performing healthcare ETFs, confirming it’s meaningful to count Moderna and Teladoc Health (NYSE:TDOC) among its top holdings.
BTEC, which tracks the Nasdaq Healthcare Innovators Index, isn’t a dedicated biotech ETF, but biotechnology stocks do represent a fair slice of the fund’s portfolio. Rather, as its name implies, BTEC focuses on healthcare innovators, giving it diversity across biotech, healthcare equipment and telemedicine names, just to name a few.
Translation: BTEC is a growth play. Its index methodology allots for earnings inconsistencies while emphasizing research and development-intensive companies.
Even with that, BTEC isn’t richly valued, trading at just 17.32x earnings. That’s growth at a reasonable price.
First Trust NYSE Arca Biotechnology Index Fund (FBT)
Expense ratio: 0.55% per year
With $2.17 billion in assets under management, the First Trust NYSE Arca Biotechnology Index Fund is one of the largest biotech ETFs. It features an equal-weight mix of 30 stocks and is higher by 11.44% year-to-date.
That’s an admirable performance considering the fund isn’t heavily allocated to Covid-19 vaccine developers. FBT doesn’t hold shares of Moderna and its biggest coronavirus holding is a just-over 3% allocation to Gilead Sciences (NASDAQ:GILD).
Lack of coronavirus vaccine exposure isn’t a knock on FBT though. While it may be a near-term hurdle of sorts, the fund is levered to other exciting biotech themes, including genomics, liposome technology and oncology. Additionally, this fund has an extensive history of topping cap-weighted rivals.
Loncar Cancer Immunotherapy ETF (CNCR)
Expense ratio: 0.79% per year
The Loncar Cancer Immunotherapy ETF focuses on firms making or engaged in clinical trials for cancer immunotherapy drugs. In a normal market climate, CNCR would be a compelling idea, but this year, investors’ preference for direct coronavirus plays is working against the fund.
However, investors shouldn’t be deceived by the name because CNCR has one of the largest Moderna allocations among all ETFs.
And as is the case with some of the other funds highlighted here, CNCR offers investors compelling growth prospects despite the perception that it lacks for Covid-19 exposure.
The cancer immunotherapy market “is poised to hit around US$ 115.4 billion by 2026,” according to Accumen Research. That represents a compound annual growth rate (CAGR) of 10.6% from 2019 through 2026.
“Growing demand for cancer immunotherapy in various end user applications growing awareness about cancer treatment across the globe and multi-functionality of cancer immunotherapy are the main drivers for the market growth of the global cancer immunotherapy market over the forecast period,” according to the research firm.
ETFMG Treatments, Testing and Advancements ETF (GERM)
Expense ratio: 0.68% per year
Timing is of the essence with new ETFs and on that note, the ETFMG Treatments, Testing and Advancements ETF is easily one of this year’s best-timed rookie ETFs.
GERM debuted in late June and is already flirting with $73 million in assets under management. No sooner did GERM debut than there was a sizable spike Covid-19 cases across the U.S.
The GERM cause is helped by a 15% combined weight to Novavax (NASDAQ:NVAX) and Moderna as well significant exposure to makers of coronavirus diagnostics and testing equipment.
It may seem counterintuitive to say because of the time of GERM’s debut and the initial enthusiasm for the fund, but this product doesn’t need the coronavirus to be a potential winner for investors. Unfortunately, Covid-19 isn’t the first pandemic the world has dealt with it and it won’t be the last.
That’s one of the reasons the global vaccine ETF offers double-digit CAGR over the next several years. In fact, many GERM components could thrive amid future pandemics because these companies are honing research, development and testing capabilities due to Covid-19.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
