Investors interested in the life science sector are well aware of the importance biotechnology has in this area of investment. From finding cures for disease to feeding future generations, there are many areas of day-to-day life that are influenced by biotechnology.
But how can investors invest in biotechnology? And what options exist for investors in the biotechnology sector?
Here’s a brief overview of how to invest in biotechnology, from stocks to 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 biotech and pharmaceuticals. “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 a sufficient body of information to show that their drug is 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 trials.
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 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
The biotech sector has not been performing well lately, and that may be worrying for some investors. One way for investors to mitigate some of the risks that are inherent with investing in stocks is to look at ETFs.
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 NYSEARCA Biotechnology Index (NYSE:BTK) and the NASDAQ Biotechnology Index (NASDAQ:NBI).
Earlier in the year, the Investing News Network (INN) took a look at the top performing ETF’s in life sciences year-to-date with data compiled from ETF Database. These ETFs have a varied set of companies working in different aspects of the sector.
The largest ETF in the biotech sector is the iShares NASDAQ Biotechnology ETF (NASDAQ:IBB),INN has tracked the progress of. Year-to-date, this ETF has posted a 3.36 percent gain, which bodes well at representing the performance of the sector overall.
Another biotech ETF second on the list of top biotech ETFs was the SPDR S&P Biotech ETF (ARCA:XBI), it has $4.895 billion in total assets and has had a 8.95 percent increase for a year-to-date return. For more information about this ETF, read our list of 5 Biotechnology ETFs to Consider.
State of the biotech market
Investors interested in the biotech market understand it’s often a slow wait to making gains, as companies rely on FDA approvals and feedback. An article by Forbes’ Bruce Booth predicts 2018 could be another big year for the biotech industry. Some things to look forward to in 2018 are biotech M&A’s refreshing the industry, venture capital funding should continue ( and of course, companies investing in R&D resulting in new innovations will be the base for worthy investments.
“Although we saw proportionately fewer first-in-class agents get approved by the FDA in 2017 than prior years, many of these new drugs are fantastic additions to healthcare,” said Booth. “Many are reaching the summit of actually curing diseases, rather than simply treating them.”
This is an updated version of an article first published on the Investing News in 2016, with the most recent update done by Gabrielle Lakusta.
Securities Disclosure: We, Bryan Mc Govern and Gabrielle Lakusta, hold no direct investment interest in any of the companies mentioned in this article.