Definition and Top Funds for Biotech Mutual Funds
The stocks of businesses in the biotechnology sector, which is a subset of the larger health sector, are purchased by biotech mutual funds.
One of the top-performing industries in 2020 was biotechnology. The biotech sector can be a wise addition to a diversified portfolio if you're investing for the long term. Although prices can fluctuate quickly, historically speaking, biotech funds have outperformed markets over the long term.
Main Points
- Large and developing biotech firms like Amgen (AMGN), Gilead Sciences (GILD), and Biogen are included in biotech mutual funds (BIIB).
- Biotech mutual funds are offered by a number of brokerages, including Fidelity, Rydex, and T. Rowe Price.
- When investing in a biotech fund, consider its track record of performance, risk factors, expense ratio, and manager tenure.
- According to some experts, you shouldn't put more than 5% to 10% of your money into one sector when investing in sector mutual funds.
Methods for Choosing the Best Mutual Funds for Biotech
You should know a few things before you buy if you're considering including a biotech sector fund in your portfolio. It's critical to comprehend some of the fundamental details and characteristics of the fund, just like when investing in any other mutual fund or exchange-traded fund (ETF). These consist of the manager's tenure, expenses, risk factors, and performance history.
Here are a few things to think about before investing in biotech mutual funds.
Performance Profile
It's important to remember to place more emphasis on long-term performance than short-term performance when examining historical returns for biotech funds. Specifically with regard to actively managed funds. Every five years, even the best fund managers experience at least one year of subpar performance. Make sure the index fund or ETF you choose tracks the performance of its benchmark.
Investing Beta
In addition to having a higher market risk than indices that represent the broad market, like the S&P 500 index, biotech funds also have the potential for high relative returns. Greater price volatility results from this (ups and downs).
You can use a statistic known as a beta to compare the volatility of a biotech mutual fund to the market. For instance, a beta of 1.00 indicates that market volatility is equal. Greater volatility is the result of a higher beta, which results in price fluctuations that are 20% greater on the positive side and 20% lesser than the market with a beta of 1.20.
Alpha and Manager Tenure
Alpha and manager tenure are important metrics to understand for actively managed funds. For instance, you would want to confirm that the fund manager has been with the fund for ten years if you find a top-performing biotech fund with a stellar 10-year return. The new manager cannot be given full credit for the performance of the manager's tenure is less than 10. Additionally, a positive Alpha indicates that the manager adds value by outperforming what the fund's beta would anticipate.
Spending Ratio
Expenses matter in the world of mutual funds. This is due to the fact that higher costs can result in lower returns, particularly over the long term and for specific types of funds. Lower costs are crucial with index funds and ETFs because active management cannot support higher costs. Higher costs for actively managed biotech mutual funds would only be accepted if they consistently outperformed the market. The typical expense ratio for funds in the health sector is around 0.6 percent.
Important: Most all of these characteristics will be present in the top biotech mutual funds:
- superior long-term returns
- a long-term manager (more than five years)
- Market risk that is average to below average
- lower than average costs
Particularly true for the majority of actively managed biotech funds. Low expenses are the most crucial factor to look for in biotech index funds and ETFs.
Three of the best mutual funds for biotech in 2021 and beyond
The top mutual funds for biotech will have a strong track record in terms of market risk, low costs, and other variables. The returns on biotech stocks and funds are typically higher than average. Nevertheless, their market risk is higher than average. In order to demonstrate how to choose the best biotech mutual funds, we looked into dozens of funds before settling on the top three.
Here are the top three biotech mutual funds to invest in right now, in no particular order:
- One of the few actively managed mutual funds dedicated to the biotechnology sector is Fidelity Select Biotechnology (FBIOX). Performance, expenses, and manager tenure, three of the key factors in selecting a fund, are areas where FBIOX excels. FBIOX had an annualized return of 20.97% over the past ten years as of March 10, 2021. By 5%, this outperformed the industry average. Furthermore, it outperforms the S&P 500 index performance, which had a return of 13.88 percent during the same time frame. Since the beginning of the fund's existence in 2005, Rajiv Kaul has served as its manager. There are only 0.72 percent costs associated with FBIOX.
- Rydex Technology (RYOIX) is a biotech mutual fund with a long history that has been around since 1998. The 16.52 percent return over ten years outperforms other technology funds by almost 3 percent. Michael P. Byrum, the fund's manager, has been in charge since the fund's inception more than 20 years ago. The long-term returns have historically justified the expense, even though the expense ratio of 1.47 percent is higher than the industry average.
- Health Sciences at T. Rowe Price (PRHSX): Consider PRHSX if you want exposure to stocks in the health sector and the biotechnology industry. The largest portion of the fund's assets, or 85.67 percent, are made up of biotech stocks. The goal of fund managers is to maintain that allocation at 80% or higher. The impressive 10-year return through December 31, 2020, was 20.49%. Ziad Bakri, the current fund manager, has been in charge for just over five years. The five-year return of 14.3 percent surpasses the benchmark by slightly more than 1%.
- Typically, biotech mutual funds hold substantial, expanding biotechnology stocks like Amgen (AMGN), Gilead Sciences (GILD), and Biogen (BIIB). Don't give one sector a disproportionately large portion of your portfolio's allocation if you want to add a biotech mutual fund. A 5–10% allocation to a sector fund is a good range for most investors. Additionally, even though biotech mutual funds have historically outperformed the overall market, these funds also have higher relative risk.
We don't offer advice or services related to taxes, investments, or finances. The information is being provided without taking into account any specific investor's investment goals, risk tolerance, or financial situation, so it might not be appropriate for all investors. Future outcomes cannot be predicted based on past performance. Risks associated with investing include the potential loss of principal.
