This approach didn’t resonate with investors when it launched in late 2014. The fund’s value dipped modestly in 2015 and then fell sharply by 20 percent in 2016. “Investors were skeptical about the newest gene-editing technologies such as CRISPR,” says Manisha Samy, a genomics analyst at ARK Investments.
CRISPR refers to the set of technologies that can cut, insert, activate or regulate mutated genes. A steady string of breakthroughs in research labs starting at the end of 2016 led investors to become much more bullish on CRISPR and other genomics technologies. In response, the ARK Genomics fund surged 46 percent last year, and is up more than 20 percent again in 2018. That more than makes up for a somewhat stiff 0.75 percent expense ratio.
That expense ratio pays for an active management approach. Potential holdings are screened across various criteria including “people, management and culture, a wide moat, product leadership, execution and thesis risk,” says Samy. “Firms with the highest level of conviction by those measures lead to the most concentrated positions in the fund,” she adds. Recent top holdings include Illumina Inc., Intellia Therapeutics and Editas Medicine.
Samy says technologies such as CRISPR (which is represented by three CRISPR pure plays among the fund’s top ten holdings) represent a potentially massive new market. CAR-T cancer therapies, for example, could generate $250 billion per year in revenues, with billions in royalties flowing to the firms that are now developing the technology, she notes.
And using CRISPR in agriculture could lead to higher crop yields and deliver an incremental $169 billion in value by 2025.
That said, focusing on a biotech niche such as genomics will likely produce more volatile returns. As a result, it may be best to pair sector exposure with a biotech fund that owns larger, more stable firms. One option is the SPDR S&P Biotech ETF and its impressive long-term performance and affordable 0.35 percent expense ratio. Another solid buy-and-hold biotech ETF option is the First Trust NYSE Arca Biotechnology Index Fund.
Keep in mind the biotech sector can experience periods of sharp downturns, such as during the latter half of 2015 and early 2016 and, more recently, this year's fourth quarter. But the sector should be a good bet for long-term investors because biotech firms both large and small are in the midst of a decades-long renaissance that should help deliver outsized returns well into the future.