What options exist for investors who want to invest in biotechnology? From stocks to ETFs, there are plenty of choices.
Investors interested in the life sciences are well aware of the importance that biotechnology and biotech companies have in this area of investment.
From finding cures for diseases to feeding future generations, there are many areas of day-to-day life that are influenced by biotechnology.
But how can investors gain exposure to biotechnology? And what investing options exist in the sector? Here’s a brief overview of how to invest in biotechnology, from stocks to exchange-traded funds (ETFs).
Invest in biotechnology: Stocks
The main method of investing in the biotech sector is through stocks. As Investopedia explains, when investing in the biotech sector it’s important to understand that there is a difference between a biotech company and a pharmaceutical company.
“From a philosophical standpoint, biotechnology is a risk-taking enterprise, while the pharmaceutical industry is about managing and diversifying risk,” the publication notes, adding that biotech stocks tend to have insignificant revenue compared to pharmaceutical stocks.
When investing in the biotech sector, investors should also pay attention to the US Food and Drug Administration (FDA), which requires that all companies in the sector establish sufficient bodies of information to show that their drugs are safe and effective. That is generally accomplished in the clinical trial phase of product testing and is typically done over a series of three clinical studies.
Additionally, as with most other sectors, when investing in biotechnology stocks investors must decide on the level of risk they are willing to take. For instance, a large, established biotechnology company with a multibillion-dollar market cap is less likely to succumb to bad market conditions than a more speculative, newly listed company in the clinical trial phase.
Invest in biotechnology: ETFs
While investing in biotech stocks is generally the more popular choice in terms of investment options in the sector, ETFs are a way to mitigate some of the risks that are inherent with investing in stocks.
ETFs hold assets like stocks, commodities and bonds, and trade close to their net asset value. Typically, ETFs track an index. For biotechnology, there are several indices that can be followed, including the S&P Biotech Select Industry Index (INDEXSP:SPSIBI), the NYSE Arca Biotechnology Index (INDEXNYSEGIS:BTK) and the NASDAQ Biotechnology Index (INDEXNASDAQ:NBI).
The largest ETF in the biotech sector is the iShares NASDAQ Biotechnology ETF (NASDAQ:IBB). Started on February 5, 2001, this ETF tracks 205 holdings, with the top three weighted at over 7 percent each. These biotechnology companies include Amgen (NASDAQ:AMGN), Gilead Sciences (NASDAQ:GILD) and Vertex Pharmaceuticals (NASDAQ:VRTX).
The second top biotech ETF is the SPDR S&P Biotech ETF (ARCA:XBI), which launched on February 6, 2006, and tracks 141 holdings in its portfolio. Its top three weighted companies are Invitae (NASDAQ:NVTA), Exact Sciences (NASDAQ:EXAS) and Arrowhead Pharmaceuticals (NASDAQ:ARWR).
Invest in biotechnology: Market outlook
Investors interested in the biotech market understand it’s often a slow wait when it comes to growth in gains, as companies rely on FDA approvals and feedback.
In terms of the sector’s future outlook, a report from Global Market Insights indicates that the global biotechnology market will soar past US$729 billion by the year 2025, fueled by an increase in chronic diseases and the healthcare costs associated with those conditions. Innovative products within the biotechnology sector will also contribute to the revenue size. These areas include growing human organs, plants and meat in labs.
Fior Markets predicts that the global biotechnology market will have a compound annual growth rate of 7.02 percent between 2020 and 2027 to reach US$833.34 billion by the end of the forecast period.
The firm’s analysts attribute this growth to the increasing need for new drugs to treat chronic diseases, such as strokes, cancer, asthma and hypertension. The focus is on diagnostics and therapeutic solutions for these chronic diseases. There is also increasing demand for biotechnology innovation in the agriculture sector in response to rising demand for organic food products.
This is an updated version of an article first published by the Investing News Network in 2016.
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Securities Disclosure: I, Nicole Rashotte, hold no direct investment interest in any of the companies mentioned in this article.