IBBQ vs. PBE: Which Biotech ETF Is the Better Buy?

Investors looking for exposure to biotech have two very different options from the same fund family. The Invesco Nasdaq Biotechnology ETF (NASDAQ:IBBQ) spreads its bets across 251 companies and charges low fees, while the Invesco Biotechnology & Genome ETF (NYSEMKT:PBE) takes a concentrated, quant-driven approach with just 31 holdings and offers a higher dividend yield.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

IBBQ is the cheaper option, with 0.19% expense ratio compared to 0.58% for PBE. However, income seekers may prefer PBE's higher 1.73% dividend yield, which is more than twice IBBQ's 0.80% yield.

Performance & risk comparison

What's inside

Launched in 2021, IBBQ tracks a broad basket of 251 companies, allocating at least 90% of its capital to the Nasdaq Biotechnology Index. Its largest positions include Amgen (NASDAQ:AMGN) at 8.6%, Vertex Pharmaceuticals (NASDAQ:VRTX) at 8%, and Gilead Sciences (NASDAQ:GILD) at 7.3%.

PBE, in contrast, focuses on a much narrower set of 31 U.S.-based companies, typically allocating 90% of its assets to the Dynamic Biotech & Genome Intellidex Index. The benchmark selects components by evaluating price momentum, earnings growth, and company management. PBE's largest positions include Regeneron Pharmaceuticals (NASDAQ:REGN) at 5.4%, Amgen at 5.2%, and CareDx (NASDAQ:CDNA) at 5%. PBE was launched in 2005.

Despite holding roughly eight times as many companies, IBBQ is actually the more top-heavy of the two: its top three holdings make up about 24% of the fund, versus roughly 16% for PBE's top three. In other words, IBBQ's larger holdings count doesn't fully translate into reduced concentration risk -- it still leans heavily on a handful of megacap biotechs at the top.

For more guidance on ETF investing, check out the full guide at this link.

Which looks like the better buy

For most investors, IBBQ's combination of broad diversification and a low 0.19% expense ratio probably makes it the more sensible core holding -- though its broad holdings count is a bit deceiving. Spreading exposure across 251 companies helps cushion the blow when any single drug trial or FDA decision goes sideways -- and in biotech, those binary events happen often. But with roughly 24% of the fund concentrated in its top three names, a stumble at any one of these top holdings will still have an outsize impact on the fund. The biotech sector has been in the headlines a lot lately, with GLP-1 competition, a wave of M&A among mid-cap drugmakers, and looming patent cliffs for several blockbuster therapies all shaping which companies win and lose.

PBE's appeal is narrower. Its quant-driven process leans into momentum and earnings growth, and its smaller, more concentrated portfolio currently offers a bigger dividend yield -- currently 1.73%, more than double what IBBQ pays. That's notable for income-focused investors, since biotech ETFs aren't typically known for offering a meaningful yield. Counterintuitively, even with its 31-company portfolio, PBE 's top three holdings make up about 16% of the fund -- which is less top-heavy than IBBQ. So the "concentrated" label applies more to PBE's total holdings count than to single-stock risk at the top. And with an expense ratio more than triple IBBQ's, investors are paying more to own a much smaller basket of stocks.

For long-term investors seeking broad, low-cost exposure to healthcare innovation, IBBQ is probably the better fit. For those willing to pay up for a more selective, income-tilted approach, PBE offers a reasonable alternative -- as long as they're comfortable with the added concentration risk.

Buying IBBQ or PBE makes the most sense for investors with a specific, deliberate view on biotech as a theme. Investors who are newer to investing, or who'd rather not actively manage their own sector exposure, may be just as well served by a plain S&P 500 index fund -- which already includes Amgen, Vertex, Gilead, and Regeneron, among other large biotech and pharma names.

Andy Gould has positions in Regeneron Pharmaceuticals and Vertex Pharmaceuticals. The Motley Fool has positions in and recommends Amgen, Gilead Sciences, Regeneron Pharmaceuticals, and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.