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 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 in the biotechnology 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 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 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 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
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 NYSEARCA Biotechnology Index (NYSE:BTK) and the NASDAQ Biotechnology Index (NASDAQ:NBI).
The largest ETF in the biotech sector is the iShares NASDAQ Biotechnology ETF (NASDAQ:IBB). Started on February 5, 2001, this ETF tracks 221 holdings, with the top three weighted at over 8 percent each. These biotechnology companies include Celgene (NASDAQ:CELG), Gilead Sciences (NASDAQ:GILD) and Amgen (NASDAQ:AMGN).
The second top biotech ETF is the SPDR S&P Biotech ETF (NYSEARCA:XBI), which launched on February 6, 2006 and tracks 121 holdings in its portfolio. The top three weighted companies are Array BioPharma (NASDAQ:ARRY), Mirati Therapeutics (NASDAQ:MRTX) and Exact Sciences (NASDAQ:EXAS).
Biotech market outlook
Investors interested in the biotech market understand it’s often a slow wait when it comes to making gains, as companies rely on FDA approvals and feedback.
In terms of the market’s future outlook, a report from Global Market Insights indicates that the biotechnology market will soar past US$775 billion by the year 2024, 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, lab-grown plants and meat.
Meanwhile, a report from IBIS World says that US biotechnology market revenue increased 1.5 percent between 2013 and 2018 to reach US$108 billion. This bodes well for the market’s future outlook and investors interested in the space.
This is an updated version of an article first published by the Investing News Network in 2016.
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Securities Disclosure: I, Jocelyn Aspa, hold no direct investment interest in any of the companies mentioned in this article.