The need for diversification in biotech

Investors may be attracted by the returns of biotechnology but should be cautious that it can be a risky sector, according to ETF Securities.

US biotech stocks were up 50% on average over the past 12 months and the S&P Biotechnology Select Industry index had increased by an annual average of 22.9% over the past five years.

However, while these may look attractive returns, investing directly in biotech companies could be high risk due to the failure rate of drug tests and long development periods.

In these cases, an alternative to consider would be a managed investment or exchange traded fund which would spread the risk and allow them to invest in a wider range of companies including overseas ones.

Kanish Chugh, head of distribution at ETF Securities, said: “Demand will continue to grow, not only due to the ongoing need for treatments and vaccines for existing and yet to be identified diseases, but also because of the ability to improve the way in which we treat.

“Australian investors tend to have a concentrated domestic exposure to biotechnology, given the dominance of players such as CSL, Cochlear and Resmed, but may be missing the growth and diversification offered overseas.”

The ETFS S&P Biotech ETF had returned 48% over one year to 31 January, 2021, according to FE Analytics, versus returns of 18% by the Australian Core Strategies specialist sector.

Performance of ETFS S&P Biotech ETF versus specialist sector over one year to 31 January 2021