The Best Biotech ETFs to Buy

Biotech ETFs offer investors exposure to the most innovative and growth-oriented industry within the traditionally defensive healthcare sector.

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On Wednesday, September 24, the share price of a little-known biotech company based in Amsterdam suddenly surged 247.7%.

The company, uniQure N.V. (QURE), saw its market cap surge to $2.76 billion after it announced positive trial results for its gene therapy treatment targeting Huntington's disease.

Huntington's is a rare but devastating inherited disorder that gradually destroys brain cells, leaving patients with few effective treatment options. Early progress toward a therapy was considered groundbreaking.

The incredible upside of QURE's move highlights the potential for biotech companies when clinical trials succeed. Even before commercialization, positive trial data can send valuations soaring, and in QURE's case, momentum held strong despite a follow-on share offering that diluted existing investors.

But for every QURE, there are many biotechs that go the other way. Years of costly research and clinical trials can end in failure, with stock prices collapsing on disappointing results – or companies simply running out of cash and repeatedly diluting shareholders.

This boom-or-bust dynamic makes biotech stock-picking risky. For long-term investors looking to capture the sector's upside while managing risk, biotech exchange-traded funds (ETFs) can provide far more diversified exposure.

The life cycle of a biotech stock

Investing in biotech can resemble a salmon run, where only a small fraction make it through. Most begin with an idea or research, form a company, and raise money through an initial public offering (IPO) or venture capital.

From there, everything depends on clinical trials.

Phase 1 typically involves 20 to 100 participants, often healthy volunteers or patients with the condition.

It usually lasts several months and focuses on safety and proper dosage.

According to Food and Drug Administration (FDA) data, about 70% of drugs advance to the next stage.

Phase 2 expands to several hundred participants who have the condition. Studies can run from several months to two years.

The goal here is to test whether the drug works as intended while continuing to monitor side effects.

Roughly one in three drugs move on to Phase 3.

Phase 3 scales up further, involving 300 to 3,000 patients.

Trials often last one to four years and are designed to confirm effectiveness, compare results with existing treatments, and carefully track adverse reactions.

Only about 25% to 30% of drugs succeed in moving beyond this stage.

The probabilities are also compounded across phases, which means the funnel narrows quickly. Even though about 70% of drugs clear Phase 1, only a third of those make it through Phase 2, and then just a quarter to 30% of those advance beyond Phase 3.

Even passing Phase 3 doesn't guarantee success. Before commercialization, companies must file a New Drug Application with the FDA. The agency reviews clinical results, safety, and manufacturing standards, and approval can take more time – all while expenses keep mounting.

Thus, managing cash is just as critical as producing positive trial results. Biotech companies burn millions each quarter without revenue, apart from grants or partnerships. Many raise money by issuing new shares, which dilutes existing investors. QURE recently did this after positive trial results, taking advantage of elevated prices to extend its runway.

The odds of a drug successfully moving from first-in-human trials all the way to approval are slim, which is why the biotech sector carries such high risk and high reward.

However, biotech firms that do clear these hurdles can see enormous upside, either through commercial revenue or acquisition by one of the biotech giants such as Gilead Sciences (GILD), Amgen (AMGN), Regeneron Pharmaceuticals (REGN) or Vertex Pharmaceuticals (VRTX).

These four stocks are large enough to stand on their own, often with cash-rich balance sheets and, in rare cases, dividends. They sometimes partner with smaller firms, such as Vertex's 60-40 revenue split with CRISPR Therapeutics (CRSP) on Casgevy, a gene-editing therapy for sickle cell disease.

This cycle explains the variety of biotech ETFs available. Some emphasize large, established companies with steady pipelines, while others tilt toward smaller, speculative players.

Diversification spreads some risk, but the underlying boom-or-bust dynamic remains.

How we picked the best biotech ETFs

Given the boom-or-bust nature of the sector, prioritizing risk was the first concern in selecting biotech ETFs. That meant culling the most speculative options.

We began by excluding leveraged and inverse biotech ETFs. These are designed to deliver two or three times the daily move of an underlying biotech index, up or down.

While such funds can be useful for traders looking to profit from the sector’s constant news flow and volatility, they are not suited for buy-and-hold investors. They also tend to be expensive, with costs that add up quickly.

High fees were the next screen. Some biotech ETFs charge elevated expense ratios due to their specialization.

For example, funds that only hold clinical-stage companies or that actively screen for cutting-edge innovators, such as Cathie Wood's ARK Genomic Revolution ETF (ARKG), often carry fees exceeding 0.75%. On a $10,000 investment, that’s $75 a year, which compounds over time and drags on returns.

We set a maximum expense ratio of 0.6% for eligible funds.

Finally, we applied our usual criteria for liquidity and stability.

That meant focusing on ETFs with a 30-day median bid-ask spread of 0.2% or less, and with at least $100 million in assets under management to reduce closure risk.

Tony started investing during the 2017 marijuana stock bubble. After incurring some hilarious losses on various poor stock picks, he now adheres to Bogleheads-style passive investing strategies using index ETFs. Tony graduated in 2023 from Columbia University with a Master's degree in risk management. He holds the Certified ETF Advisor (CETF®) designation from The ETF Institute. Tony's work has also appeared in U.S. News & World Report, USA Today, ETF Central, The Motley Fool, TheStreet, and Benzinga. He is the founder of ETF Portfolio Blueprint.