Investing in biotechnology companies is a lot like being a venture capitalist: it’s not exactly advisable to put all of your money into one company. Biotech companies come and go, their success or failure often hinging on just on development. For that reason, biotechnology exchange traded funds (ETFs) may be one of the best ways to get exposure to this sector.
The Biotechnology Industry
Biotechnology has been improving our quality of life for generations.
The industry does everything from researching a cure for cancer to finding disease-resistant crops and more. The biotech industry utilizes cellular and biomolecular processes to create breakthrough products and technologies to improve our health, protect the environment, feed the hungry, develop cleaner energy and better manufacturing processes.
Applications include improved treatment techniques in the health care industry, creating more efficient manufacturing processes, decreasing our footprint on the environment and growing higher-yield crops with greater nutritional values.
Because biotechnology companies are often backed by venture capital while they do research and development, they often turn to other ways to earn more cash, including:
- For example, big pharma believes that the next step in generating greater revenue streams is through research and development in niche diseases. If those drugs prove to be successful at treating those diseases, they could potentially be lucrative for their creators.
- Acquisitions have also been hot this year. Large pharmaceuticals are also looking to acquire other companies that specialize in rare diseases since the barriers to entry are high.
The Need for Biotech
The world will always need more research and development, but these days, it seems to be more important than ever before.
For starters, an aging population in the United States and the prevalence of chronic and age-related illnesses will be a major market for these companies.
Hunger in Africa is increasing as agricultural productivity diminishes, and the Food and Agriculture Organization calculates that more than 1 billion people do not have enough to eat. Experts have suggested that genetically modified organisms (GMOs) could increase food security through greater crop yields, provide hardier crop varieties, enhance nutritional value and improve storability.
Additionally, the biotech sector is driven by and dependent on several key things:
- Mergers and acquisitions: Often, stronger, more financially well-positioned firms will gobble up the smaller ones.
- Upcoming products: Biotech companies sink a ton of money into new product research and development, and their profitability depends on their ability to get them to the market.
- Regulations: The biotech industry is awash with patents, rights and regulations. Any shifts in the rules will have an impact on the companies making up the sector.
- Financing: One thing the biotech industry needs is money for its research. Nearly every biotech company in existence was started by risk venture capital.
- Success: If a company becomes successful, they can become really valuable. For example, 12 years after Amgen (NASDAQ: AMGN) was founded, it had a market cap of $8 billion.
However, factors that could curtail the sector’s growth include pressures to keep costs low, a lack of technical development and expertise, since many companies need skilled medical professionals.
The Case for Biotech ETFs
Biotechnology can be a hard sector in which to pick single stocks because the success or failure of many companies rests on one make-or-break development. Stocks of the biotech sector are highly volatile and are affected by binary events. For instance, biotech stocks are very sensitive to decisions made by the Food and Drug Administration – for better or worse.
This makes ETFs an ideal way to invest in this sector – you can diversify against some risk while still taking part in the sector.
If your clients are looking for some exposure to biotechnology, there are a variety of ways to get it through ETFs.
There are a number of biotech-focused ETFs, or you can look at sub-sector health care and pharmaceutical ETFs that are closely related to biotechnology companies. Some of the funds available include:
- iShares Nasdaq Biotechnology (NYSEArca: IBB) is the largest of the biotech ETFs
- PowerShares Dynamic Pharmaceuticals (NYSEArca: PJP) is the top-performing pharmaceutical ETF, up 27.4% in the last six months
- First Trust Health Care AlphaDEX (NYSEArca: FXH) gives exposure to 72 companies in the health care sector, including insurers, biotech companies and medical equipment providers
You can review and compare all the biotech ETFs on the market today in the ETF Analyzer. As a pro member of ETF Trends, don’t forget that you can add biotech ETFs to your ETF Watchlist and set up alerts to be notified of trading opportunities in this sector!