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Biotech ETF definition

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Biotech ETF (a biotechnology industry exchange-traded fund) is an ETF that invests in biotechnology companies and tracks the value of the underlying assets.

Key takeaways:

  • Biotech ETF is a type of investment fund that tracks the performance of a basket of biotechnology stocks.

  • Biotechnology industry ETFs provide diversification by investing in a range of biotech companies across various sub-sectors.

  • Investing in a biotechnology industry ETF allows investors to participate in the potential growth and innovation of the biotech sector.

  • Biotech ETF typically tracks a specific index, such as the NASDAQ Biotechnology Index, which consists of selected biotech companies. By mirroring the index's performance, ETF provides investors with a benchmark for evaluating the overall performance of the biotech industry.

An ETF can represent a range of investments concentrated in a particular sector, such as biotechnology. It gives investors another way to get exposure to a certain area of the market and diversify their portfolio. Unlike a mutual fund, an ETF trades on an exchange in the same way as a stock does.

A designation as a Biotech ETF means that the particular ETF represents stocks of companies that are involved in the development of products or services which integrate natural sciences and engineering technology in applications related to cellular or living organisms.

According to Biotechnology Innovation Organisation: “At its simplest, biotechnology is technology based on biology – biotechnology harnesses cellular and biomolecular processes to develop technologies and products that help improve our lives and the health of our planet. We have used the biological processes of microorganisms for more than 6,000 years to make useful food products, such as bread and cheese, and to preserve dairy products.”

Biotech sector ETF explained

Biotechnology has applications in four major industrial areas, including healthcare, agriculture and crop production, industrial (non-food) use of crops for other products (such as vegetable oils, cultivated meat, flavourings, construction materials, cosmetics and even clothing), and other environmental uses and products (such as biofuels, biodegradable plastics, enzymatic detergents, biofertilisers and biopesticides).

“The biotechnology industry includes a diverse array of products created within distinct sectors throughout this broad industry. From these sectors arise differing types of products, from therapeutics to biofuels, and from diagnostics to herbicide-tolerant soybeans. Each of these products depend on similar biotechnology tools and methods for their innovation and product creation,” said Craig Shimasaki PhD, MBA, in Biotechnology Entrepreneurship.

According to the ETF Database, “Biotech ETFs invest in stocks of companies in the biotechnology industry, many of which are involved in the use of biological processes such as recombinant DNA technology, molecular biology, genetic engineering and genomics.” 

Examples of Biotech ETFs  

As of 3 March 2022, the two largest from the list of biotechnology ETFs include iShares Biotech ETF and SPDR S&P Biotech ETF

Two largest biotechnology ETFs (as of 3 March 2022)

Advantages and disadvantages of biotech ETFs

An ETF, like a mutual fund, allows an investor to diversify across a particular industry, index or segment of the stock market without purchasing a large number of individual securities

In the case of the biotech industry, with huge research costs and high failure rates for companies, this can provide exposure to a high-risk, high-reward industry requiring less fundamental research than would be necessary to invest in a single company. Like stocks, an ETF can be bought and sold at any time during the exchange trading hours. 

Investing in ETFs does hold risks, however. According to the iShares prospectus: “Securities and other assets in the Underlying Index or in the Fund’s portfolio may underperform in comparison to the general financial markets, a particular financial market or other asset classes.”

There are also risks in excess of normal market conditions typically associated with biotechnology ETF stocks. 

“Biotechnology companies face intense competition and potentially rapid product obsolescence. Biotechnology companies may be adversely affected by the loss or impairment of intellectual property rights or changes in government regulations,” added iShares.

Like any investment, it is important to research the ETF issuer thoroughly prior to purchasing to ensure it aligns with your investing goals.   

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