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What Is Biotech and Should You Invest In It?

With COVID-19 dominating the news, biotechnology companies are racing to find a vaccine. More than 100 projects to find a vaccine are underway, with eight candidate vaccines in clinical evaluation, as listed by The World Health Organization. 

But what exactly is biotechnology? And how, if at all, should you invest in this important player in the COVID-19 pandemic? 

What exactly is biotech?

Biotechnology is the manipulation through genetic engineering of living organisms or their components to produce useful, usually commercial products. Biotechnology in its current form traces back to 1977, when Genentech reported the production of somatostatin, a human growth hormone created by recombinant DNA technology. 

The following year saw the first application for a patent on a gene and introduced the legal precedent that a gene could be patented. It’s estimated that of approximately 30,000 genes, around 20% of them are patented. 

Now with the looming presence of COVID-19, two biotechnology companies in particular, Gilead Sciences (GILD) and Moderna (MRNA), have dominated the news with potential vaccines. 

Robinhood users have piled into Moderna over the last few weeks (Source: Robintrack)

Companies to Keep an Eye On

Gilead Sciences’ drug remdesivir has shown promise against COVID-19 and was recently given emergency use authorization by the U.S. Food and Drug Administration (FDA). The U.S. Department of Health and Human Services announced it will allow state health departments to distribute the drug to patients. Shares of Gilead Sciences have gained more than 19% so far this year based on the potential of remdesivir. 

Moderna, whose shares have gained more than 200% so far this year, was given FDA approval for its COVID-19 vaccine candidate to proceed to phase two trials last week. Moderna will soon proceed to phase two trials with 600 participants, while finalizing plans for phase three trials as early as this summer. The company was also awarded $483 million by the Biomedical Advanced Research and Development Authority to accelerate the development of its vaccine candidate. 

With biotechnology companies mostly driven by the success or failures of their drug candidates, the stocks can be highly volatile. The best way to invest in the sector is through a biotechnology ETF, in which there are more than a dozen. 

The largest biotechnology ETF is the iShares Nasdaq Biotechnology ETF (IBB), with more than $8 billion in AUM. IBB tracks the investment results of an index composed of biotechnology and pharmaceutical equities listed on the NASDAQ and has an expense ratio of 0.47%. IBB has gained more than 6.6% so far this year compared to a nearly 10% decline in the S&P 500. The top two holdings are Amgen and Gilead Sciences, while Moderna is the ETF’s 10th-largest holding. 

The second-largest ETF is the SPDR® S&P® Biotech ETF (XBI), with more than $4.5 billion in AUM. XBI seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select IndustryTM Index. XBI has fared slightly worse than IBB, with a YTD return of 4.7%, although still far better than the overall market’s return. XBI has a slightly lower expense ratio of 0.35%. XBI’s top two holdings are Moderna and Regeneron Pharmaceuticals, while Gilead Sciences is the ETF’s 9th-largest holding. 

With so many companies vying to be the one to bring a COVID-19 vaccine to the market, interest in the biotechnology sector should persist. Besides their work on a vaccine, exposure to the sector may benefit your portfolio as these companies are working on treatments for countless diseases and illnesses. 

Header Image: CambridgeConsultants

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