The Basics of Biotechnology ETF Funds

Everything that investors need to know about decreasing risk through diversification in the biotech sector.

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Biotech has been on a hot streak lately, but savvy investors know the situation could change any time. Biotech companies must make huge R&D investments, grapple with long development timelines and always face the very real risk of products failing in clinical trials. 

For investors who are keen to invest in the sector, but are looking for ways to mitigate those risks, biotechnology ETF funds could be a good option. Such funds allow investors to get in on the excitement of the biotech industry while managing risk through diversification. Furthermore, the wide variety of biotechnology ETF funds available means that almost any investor should be able to find a good option.

Here’s a brief overview of the wide array of choices available to investors interested in biotechnology ETF funds.

What are biotechnology ETF funds?

Exchange-traded funds, better known as ETFs, are marketable securities that track a specific index, commodity, series of bonds or assets. Investopedia explains that like other ETFs, biotech ETFs trade like common stock on a stock exchange. As a result, unlike mutual funds, these ETFs don’t have a net asset value calculated at the close of the stock market. Other key differences between biotechnology ETF funds and mutual funds are their higher daily liquidity and lower fees.

Why consider investing in biotechnology ETF funds?

It takes a gutsy individual to invest in biotech, and an even gutsier person to sink a large portion of money into a single biotech stock. With the booms and busts inherent to the industry, many moderate investors are seeking to mitigate the risks of biotech investing while still maintaining the potential of a big payoff.

That is where the diversification of a biotech ETF becomes appealing. By investing in biotechnology ETF funds, individuals can benefit from the diversity of an index fund. However, there are other benefits as well: lower expense ratios than those of the average mutual fund, the ability to purchase small amounts and the potential for favorable taxation on gains.

Which fund should I invest in?

As mentioned, there are many different biotechnology ETF funds. NASDAQ explains that some ETFs, like the iShares NASDAQ Biotechnology index (NASDAQ:IBB) and the Market Vectors Biotech ETF (NYSEARCA:BBH), follow large market cap-focused indices, while others, like the SPDR S&P Biotech ETF (NYSEARCA:XBI), have a small-cap focus.

All in all, the diversity in biotechnology ETF funds means that there is a fund for every sort of biotech investor. Through ETFs, individuals get biotech’s potential for big payoff, with a more manageable approach to risk. Biotechnology ETF funds could offer the perfect entry point for individuals looking to enter the exciting but risky biotech market.

 

Securities Disclosure: I, Morag McGreevey, hold no direct investment interest in any company mentioned in this article.

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