What are Biotech ETFs?

Biotechnology (or Biotech) played a crucial role in saving millions of lives during peak COVID-19 pandemic, countering the harmful effects of this lethal virus and giving people a second chance at life. Scientists from the world's most renowned and reputable companies worked together to design, produce, and distribute life-saving vaccines in record time. The process shed light on the importance of the industry and garnered investors' attention, sending Biotech stocks through the roof. In this article we introduce the different branches of the Biotech industry, its status, future outlook, and how to get on board with Biotech ETFs.

Branches of Biotech

Biotechnology is a broad area of biology, where scientists use living systems and organisms to develop or make products. Many people link Biotech solely to human health but in fact, the industry has four main branches that target all aspects of our lives, ranging from protecting animals, preserving the environment, food processing to human health. The branches are assigned different colors to highlight the field that it is used in:

1. Green Biotechnology: Agricultural "Green" Biotechnology deals with the use of environmentally friendly solutions as an alternative to traditional agriculture, horticulture, and animal breeding processes. Examples of green biotechnology include strengthening plants resistance to pests and diseases or extreme weather conditions.
2. Blue Biotechnology: Marine "Blue" Biotechnology on marine life is defined by the OECD as "the application of science and technology to living aquatic organisms to produce knowledge, goods and services". The most basic examples are Marine-derived food products that play an integral part of human nutrition in many parts of the world. (e.g., the omega-3 fatty acids we consume as pills are derived from fish oil, marine algae, and phytoplankton).
3. White Biotechnology: Industrial "White" Biotechnology focuses on industrial production through biological processes. Anything from biopolymers substitutes, fuels for the vehicles, to the invention of fibers for the clothing industry.
4. Red Biotechnology: Medical "Red" Biotechnology includes producing vaccines and antibiotics, developing new drugs, molecular diagnostics techniques, regenerative therapies and the development of genetic engineering to cure diseases through genetic manipulation.

There is an expanded version of the branches that includes:

• Yellow Biotechnology: Food Biotechnology, Nutrition Science (e.g., Cheese Fermentation)
• Brown Biotechnology: Management of arid lands and deserts.
• Purple or Violet Biotechnology: Focus on intellectual property rights, patents, laws, ethical issues, biosecurity, philosophic issues, biosafety, and legal issues.
• Gold Biotechnology: Also called Bioinformatics, it encompasses everything from software to hardware, used in the data analysis of biological processes. Their uses are infinite: the search for Primers, the sequencing of peptides, the search for alterations in DNA, errors in the transcription of DNA among others.
• Gray Biotechnology: Environmental "Gray" biotechnology is branch of biotechnology that implements biological systems and processes in waste treatment and management, and for the protection and restoration of the quality of the environment.
• Black or Dark Biotechnology: The worst branch of biotechnology, it is linked to bioterrorism and biological warfare. Practitioners manipulate pathogenic, virulent and resistant microorganisms, to convert them into biological weapons or counteract their harmful effects.

Biotech Market Overview

According to Grand View Research, the global biotechnology market size was valued at USD 752.88 billion in 2020 and is expected to grow at a CAGR of 15.83% from 2021 to 2028 to reach USD 2.44 trillion by the end of the forecast period. The factors driving the market include leaner government policies, the discovery and launch of new and advanced products, strong R&D in the biotechnology sector, and surging demand for synthetic biology. More detail available here.

The bright outlook of the Biotech industry may interest investors who are looking for an exciting investment opportunity. It also makes sense since Biotech stocks have the potential to provide investors with incredible returns. However, investors should keep in mind that most of these stocks fluctuate based on "buy the rumors, sell the news" market phenomena. If a company's product is deemed effective and safe and ready to launch, the stocks surge. On the other hand, if the product fails, investors are in deep financial trouble.

The biggest risk around Biotech firms is regulation, including from the Food and Drug Administration (FDA) or its European equivalent, the European Medicines Agency (EMA). Tough regulations add the risk of uncertainty surrounding developing new drugs. Given the complexity of biotechnology, investors often experience challenges in determining a product's effectiveness and chances of success.

If you're up to it, we filtered out for you a list of all the Biotechnology stocks in the world with over $500 million in market capitalization. Of course, we recommend that you perform proper due diligence and invest responsibly. Check them out here: Biotech Stocks.

Investing through Biotech ETFs

If picking a stock is not your cup of tea, Exchange-traded-funds (ETFs) can be the way to go. There are over 30 Biotech ETFs available in the market with a combined $30 billion in assets under management. In 2021, the sector witnessed around $3.8 billion of net inflows as investors flocked to bank in on vaccines approvals.

Top 10 largest Biotech ETFs

1. iShares Biotechnology ETF (IBB): $9,918 million
2. SPDR S&P Biotech ETF (XBI): $7,420 million
3. ARK Genomic Revolution ETF (ARKG): $6,742 million
4. First Trust NYSE Arca Biotechnology Index Fund ETF (FBT*): $1,704 million
5. Invesco NASDAQ Biotech UCITS ETF (XLON:SBIO): $737 million
6. VanEck Vectors Biotech ETF (VESU): $560 million
7. iShares Nasdaq US Biotechnology UCITS ETF (XLON:BTEC): $500 million
8. iShares Genomics Immunology and Healthcare ETF (IDNA): $348 million
9. Invesco Dynamic Biotechnology & Genome ETF (PBE): $282 million
10. Global X Genomics & Biotechnology ETF (GNOM): $262 million

Investing in the largest Biotech ETF

iShares Biotechnology ETF or IBB is the largest Biotech ETF with close to $10 billion in assets under management (AuM). The fund invests in U.S.-listed Biotechnology and pharmaceutical companies by tracking the ICE Biotechnology Total Return Index.

IBB is well diversified with 268 holdings, including:

1. Amgen (8.18%): American multinational biopharmaceutical. Its most successful drugs include Neupogen, Prolia, Vectibix, among others.
2. Gilead Sciences (6.87%): focuses on researching and developing antiviral drugs used in the treatment of HIV, hepatitis B, hepatitis C, and influenza, including Harvoni and Sovaldi.
3. Moderna (5.59%): pharmaceutical and biotechnology company based in Cambridge, Massachusetts that focuses on RNA therapeutics, primarily mRNA vaccines. The company is one of the main suppliers of COVID 19 vaccines.
4. Regeneron Pharmaceuticals (5.39%): discovers, invents, develops, manufactures, and commercializes medicines for treating various medical conditions worldwide (e.g., diabetes, asthma, atopic dermatitis, rheumatoid arthritis to name a few).
5. IQVIA (4.16%): provides information, services, and technology for the healthcare industry.
6. Vertex Pharmaceuticals (3.98%): engages mainly in developing and commercializing therapies for treating cystic fibrosis. The company has more than a dozen ongoing research programs to cure other serious diseases.
7. Illumina (3.72%): develops, manufactures, and markets integrated systems for the analysis of genetic variation and biological function.
8. BioNtech SE (3.56%): German biotechnology company that develops and manufactures active immunotherapies for patient-specific approaches to the treatment of diseases
9. Biogen (3.19%): specializes in the discovery, development, and delivery of therapies for the treatment of neurological diseases
10. Mettler Toledo (2.85%): It is the largest provider of weighing instruments for use in laboratory, industrial, and food retailing application.

Since inception on February 1st, 2001, the fund generated a cumulative gain of +394.92% and an average annualized gain of 8%. IBB trades primarily on the Nasdaq and charges an annual fee of 0.45%. 

Investing in an UCITS stamped ETF

European investors can check out the Invesco NASDAQ Biotech UCITS ETF or SBIO. The fund tracks the NASDAQ Biotechnology Index and provides biotechnology and pharmaceuticals companies listed on the NASDAQ Stock Market and therefore has a large exposure to U.S.-based equities (89%). Its top holdings include Amgen (8.14%), Gilead Sciences (7.61), Regeneron Pharmaceuticals (6.07%), Moderna (5.73%), Illumina (5.32%), Vertex Pharmaceuticals (4.19%) and Biogen (3.4%).

With an expense ratio of 0.4%, SBIO trades on multiple European exchanges including the London Stock Exchange, SIX Swiss Exchange, Deutsche Börse, Euronext Amsterdam and Borsa Italiana. 

Since inception on November 6th, 2014, SBIO yielded a cumulative 60% gains.

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