Which Biotech ETF Is the Better Buy: VanEck’s BBH or Invesco’s Factor-Driven PBE?

The VanEck Biotech ETF (NASDAQ:BBH) provides a low-cost, concentrated play on large-cap biotech leaders, whereas Invesco Biotechnology & Genome ETF (NYSEMKT:PBE) uses a multifactor approach that has recently offered higher yields and slightly better five-year total returns.

Both funds seek to capture the growth of the healthcare and genetic research sectors but employ distinct methodologies. VanEck Biotech ETF tracks an index of the 25 largest U.S.-listed biotech companies, while Invesco Biotechnology & Genome ETF uses a quantitative selection process to identify 30 stocks with favorable growth and momentum characteristics.

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-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The VanEck fund is the more affordable choice with an expense ratio of 0.35%. While the cost difference of 0.24 percentage points may seem small, it can compound significantly for long-term investors. However, income-seeking investors might favor the Invesco fund for its higher payout.

Performance & risk comparison

What's inside

Invesco Biotechnology & Genome ETF allocates its assets entirely to healthcare, focusing on 30 companies involved in genetic engineering and biotechnological processes. Its largest positions include Natera (NASDAQ:NTRA) at 6.00%, Illumina (NASDAQ:ILMN) at 5.99%, and Biogen (NASDAQ:BIIB) at 5.68%. The fund undergoes quarterly rebalancing to ensure it continues to hold firms with strong price momentum and earnings growth. It was launched in 2005. Invesco Biotechnology & Genome ETF has paid $1.33 per share over the trailing 12 months, which on its recent ~$98.72 share price works out to a 1.3% yield.

VanEck Biotech ETF provides more concentrated exposure by holding 25 large-cap healthcare stocks. Top holdings include Amgen (NASDAQ:AMGN) at 16.31%, Gilead Sciences (NASDAQ:GILD) at 13.68%, and Vertex Pharmaceuticals (NASDAQ:VRTX) at 8.17%. By focusing on the industry established leaders through its market-cap-weighted index, it provides a different risk profile than multifactor competitors. It was launched in 2011. VanEck Biotech ETF has paid $0.96 per share over the trailing 12 months, which on its recent ~$246.57 share price works out to a 0.4% yield.

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Which looks like the better buy

Biotechnology has been one of the most rewarding corners of healthcare over the past year, powered by a wave of drug approvals, GLP-1 enthusiasm, and acquisition activity as larger pharmaceutical companies hunt for their next blockbuster. BBH has outperformed PBE over the trailing 12 months and costs significantly less, but recent returns are not the whole story for long-term investors. Here is what long-term investors should know before picking one over the other.

Because BBH concentrates in the 25 largest and most liquid biotech companies weighted by market cap, the biggest names dominate. And when those names have a good year, BBH performs well. It has outperformed PBE over the trailing 12 months and charges significantly less.

PBE uses a factor screen that evaluates biotech companies on value, growth, and momentum before selecting its 30 holdings. That process has produced better five-year returns than BBH and throws off a modest dividend that pure biotech funds rarely offer.

If you're focused on capturing the recent biotech momentum at the lowest cost, BBH is the more straightforward choice. If you're willing to pay more for a factor-driven approach with a stronger five-year track record and some income, PBE is the better fund for you.

Sara Appino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amgen, Gilead Sciences, Illumina, Natera, and Vertex Pharmaceuticals. The Motley Fool recommends Biogen. The Motley Fool has a disclosure policy.