Biotech companies use or modify biological processes to create new pharmaceuticals or therapies. Some of the most prominent biotech companies include Vertex Pharmaceuticals Inc. (VRTX) and Regeneron Pharmaceuticals Inc. (REGN).

Investing in the biotech sector can be risky. The scientific and regulatory issues involved with gaining approval from the U.S. Food and Drug Administration (FDA) can be substantial, making it risky and difficult to predict which biotech stocks will outperform.

One of the easiest ways to invest in the sector is through biotech exchange-traded funds (ETFs). These funds have holdings in a large array of biotech companies, offering investors a well-diversified portfolio in one easy-to-execute trade.

There are 10 biotech ETFs that trade in the United States, excluding inverse and leveraged ETFs as well as funds with less than $50 million in assets under management (AUM). The biotech sector, as measured by the Nasdaq Biotechnology Index, has dramatically underperformed the broader market with a total return of -19.4% over the past 12 months compared with the S&P 500’s total return of -2.6%, as of Aug. 12, 2022. The best-performing biotech ETF, based on one-year trailing total return, is the First Trust NYSE Arca Biotechnology Index Fund (FBT).

We examine the top three biotech ETFs below. All numbers are as of Aug. 12, 2022.

• Performance Over One Year: -11.6%
• Expense Ratio: 0.55%
• Annual Dividend Yield: N/A
• Three-Month Average Daily Volume: 43,281
• Assets Under Management: $1.4 billion
• Inception Date: June 19, 2006
• Issuer: First Trust

FBT aims to track the NYSE Arca Biotechnology Index, an equal-dollar-weighted index designed to gauge the performance of biotech companies primarily involved in the use of biological processes to develop products or offer services. The ETF is focused on a narrow segment of the healthcare industry, providing exposure to biotech companies that use biological processes, such as recombinant DNA technology, molecular biology, genetic engineering, and genomics to develop medicines and therapies.

The fund invests in primarily growth stocks of various market capitalizations. Its top three holdings are Alnylam Pharmaceuticals Inc. (ALNY), a company creating RNA interference therapeutics products for genetically defined diseases; Sarepta Therapeutics Inc. (SRPT), a medical research and drug development company; and Illumina Inc. (ILMN), a maker of integrated systems related to genetic variation and biological function.

• Performance Over One Year: -13.5%
• Expense Ratio: 0.59%
• Annual Dividend Yield: N/A
• Three-Month Average Daily Volume: 14,470
• Assets Under Management: $260.8 million
• Inception Date: June 23, 2005
• Issuer: Invesco

PBE offers exposure to the biotech subsector of the U.S. healthcare industry, serving up access to a group of stocks that can thrive on technological breakthroughs and increased investment in medical processes. PBE is part of the suite of Dynamic ETFs from PowerShares, using quant-based screening to identify component companies that may be poised for outperformance relative to a broad-based universe.

As such, the portfolio of this ETF is considerably more limited than the iShares Biotechnology ETF (IBB), which includes more than 100 individual names. That feature can be particularly important in the biotech space, where company-specific developments can send a single stock soaring.

PBE’s top three holdings are Chemocentryx Inc. (CCXI), a company that develops and markets therapeutics for autoimmune diseases and cancer; Catalent Inc. (CTLT), a provider of drug manufacturing services, consumer health products, and delivery technologies; and Vertex Pharmaceuticals Inc. (VRTX), a biotech company focused on developing therapies for treating serious and genetic diseases, such as cystic fibrosis.

• Performance Over One Year: -20.2%
• Expense Ratio: 0.50%
• Annual Dividend Yield: N/A
• Three-Month Average Daily Volume: 24,452
• Assets Under Management: $119.5 million
• Inception Date: Dec. 30, 2014
• Issuer: SS&C

SBIO is a small-cap growth fund that tracks the S-Network Medical Breakthroughs Index. The index focuses on companies with at least one drug candidate in Phase II or Phase III clinical trials of the U.S. FDA. Companies must have market capitalizations between $200 million and $5 billion. Over 80% of the companies in SBIO’s portfolio are U.S.-based, with a variety of countries including Switzerland, Ireland, Denmark, and China also represented.

The top holdings of SBIO include Karuna Therapeutics Inc. (KRTX), a company focused on developing therapeutics for psychiatric and neurological conditions; Ionis Pharmaceuticals Inc. (IONS), a biotech company focused on RNA-targeted therapeutics; and CRISPR Therapeutics AG (CRSP), a Swiss-American gene editing company.

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