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Investing in biotech stocks
An investment in this sector is typically a waiting game — and a gamble.
The groundbreaking research being done in this industry has the potential to change the world. But strict governing regulations may put a damper on company profits and impact investor returns.
What is biotech?
Biotechnology is the research and application of biomolecular processes. These processes are used to create products and technologies designed to help improve our quality of life and support the planet. How? By helping us combat disease, improve the environment, harness clean energy, enhance food production and devise more efficient manufacturing processes.
Each time you take an antibiotic, drink a glass of wine or admire the newest designer dog breed on social media, you’re encountering biotechnology at work.
Biotechnology stocks are stocks from companies that research and produce biotech products, like pharmaceutical drugs, vaccines, biofuels, genetically modified plants, biocatalysts and more.
Why invest in biotech stocks?
Many biotech products — like pharmaceuticals — are a necessity. And staples like these have proven their capacity to weather down markets.
For example, in the first three months of 2020, the S&P 500 dropped by a sizable 26.7%, while the iShares Nasdaq Biotechnology Index ETF — a fund that tracks US biotech and pharmaceutical companies — only lost 15.6%. And in the past year, the same fund has outperformed the S&P 500’s 10.5% return with a 31.6% return of its own.
The COVID-19 pandemic caused many markets to tank. But stocks in companies looking for effective COVID-19 treatments and vaccines have received increased interest — at least for now. This is just one example of the down market resilience of the biotech industry.
Biotech stocks can help balance your portfolio during an economic downturn while providing the opportunity for investors to back groundbreaking technology — technology with the potential to drastically alter and improve our way of life. Biotechnology can and has changed the world — and investors can lend a hand in the process.
Risks of investing in biotech
The primary risk factor for biotech investors is the long, arduous and costly process of bringing a concept through research and development to a consumer-ready product.
Many companies in this industry rely on approval from the U.S. Food and Drug Administration (FDA) and the process can take years. There’s no guarantee that a drug in development will reach pharmacy shelves or that a new industrial pesticide will be cleared for public use. Some biotech companies funnel funds into projects that span years with nothing to show for it.
The recent scramble for a COVID-19 cure demonstrates the potential instability of a biotech investment. As dozens of companies rush to develop a viable vaccine, stocks in this sector are seeing a volatility surge as investors queue to back the right racehorse. But only one can win — and once a vaccine is approved, the other companies fighting to be first may see a drop in share prices.
Investors must be willing to wait months or years for biotech stock investments to pan out. And even then, there’s no guarantee of return.
From startups with high hopes to well-established international corporations, there are numerous options for investors interested in purchasing biotech stocks. Select a company to learn more about what they do and how their stock performs, including market capitalization, the price-to-earnings (P/E) ratio, price/earnings-to-growth (PEG) ratio and dividend yield. While this list includes a selection of the most well-known and popular stocks, it doesn't include every stock available.
What ETFs track the biotech category?
For a less targeted and more diverse approach to biotech investing, consider any of the following exchange-traded funds.
- ARK Genomic Revolution ETF (ARKG)
- First Trust Amex Biotechnology Index (FBT)
- Invesco Dynamic Biotechnology & Genome ETF (PBE)
- iShares Nasdaq Biotechnology ETF (IBB)
- SPDR S&P Biotech ETF (XBI)
- VanEck Vectors Biotech ETF (BBH)
Compare trading platforms
To invest in biotech stocks, you’ll need a brokerage account. Compare features and fees of top accounts to find the best fit for your goals and budget.
Biotechnology is rife with potential, but is often subject to strict regulations. Investor funds may be tied up for years and there’s no guarantee of a return.
To invest in biotech stocks, explore your brokerage account options across multiple platforms for the account best suited for your investment goals.
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