If you are the sort of person who enjoys a cold beer after a long day, it may surprise you to learn that the beverage in your hand is a product of biotechnology.

Really.

That’s because, in the case of beer, brewers harness the biological power of yeast to produce alcohol through fermentation. Brewing is among the oldest known examples of humans harnessing natural biological processes to create something new, and modern biotech is simply a more advanced version of this ancient practice.

Modern biotech really took off in the 1970s following scientific breakthroughs in the field of genetic engineering. By combining DNA from two different organisms and inserting the new hybrid DNA into a host cell, scientists harnessed the natural process of DNA replication to produce large quantities of hybrid molecules. This technology, known as recombinant DNA technology, revolutionized biology and ushered in a new era of possibilities in which complex new substances could be synthesized in quantities sufficient to benefit mankind. 

For example, Genentech, an early pioneer in biotech, used recombinant DNA technology to develop a process for creating synthetic human insulin in the early 1980s. Prior to Genentech’s breakthrough, diabetics had to take insulin derived from the pancreas’ of pigs and cattle. 

Another major biotech breakthrough happened when Monsanto, an agrochemical company, introduced “Roundup Ready” crops in 1996. Monsanto genetically engineered Roundup Ready crops to be resistant to the highly-effective herbicide Roundup, which Monsanto had been selling since the 1970s. Farmers could buy Roundup Ready seeds from Monsanto and apply Roundup herbicide to their fields and the Roundup would kill all plants except the Roundup Ready crops, making the task of weed control significantly easier. 

Big advances in biotech have been met with a combination of excitement and concern over the years, but the transformative potential of new discoveries is undeniable.

For those interested in the investment potential of this innovative industry, there are a few important points to understand.

What is biotech?

At the highest level, biotechnology (or “biotech”) is defined as the use of biology to solve problems and make useful products. This involves the use of biology to solve problems and make useful products. Modern biotech encompasses a wide range of products and technologies.

As an industry, biotech can generally be divided into three sub-industries: biopharmaceuticals, agricultural biotech, and industrial biotech. 

The biopharmaceutical (aka biopharma) industry focuses on developing new drugs through genetic engineering, such as with Genentech’s development of synthetic insulin. Biopharma drugs are composed of molecules that are larger and more complex than traditional pharmaceuticals. These complex drugs have enormous potential for disease treatment because they are highly-effective and cause few side effects. 

The agricultural biotech industry focuses on developing new agricultural products through genetic engineering, such as with Monsanto’s development of herbicide-resistant crops. Agricultural biotech aims to make agriculture more efficient by improving crop yields, making crops less susceptible to pests and disease, and improving the nutritional value in food. 

Lastly, the industrial biotech industry focuses on harnessing the power of biological processes such as fermentation to produce energy and make industrial processes more efficient. For example, ethanol is a biofuel that is produced by fermenting corn, and it is added to gasoline to reduce air pollution. Many scientists are hopeful that further development of biofuel technology will play an important role in combating climate change. 

While people tend to associate biotech primarily with the healthcare sector, it is important to note that biotech has a wide variety of innovative applications across numerous industries.

Why invest in biotech

As an industry, biotech offers a rare opportunity in this turbulent market because it outperforms the market in recessions and the evolution of healthcare points to long-term growth. 

In the recessions of 2001 and 2008-2009, biotech outperformed the S&P by an average of 18%. Even with the S&P’s recovery in recent months, the index is still down about 5% for the year as of mid-June, while the largest and oldest biotech ETF, iShares Nasdaq Biotechnology ETF (IBB), is up about 12%. 

Stepping away from short-term volatility, Polaris Market Research projects that the industry will see a compound annual growth rate of about 7% over the next several years. The need to develop innovative treatments to challenging diseases is seen as the primary force driving this long-term growth. 

Hanging over this entire discussion of performance is, of course, the impact of COVID-19. Biotech companies are in a race to develop a vaccine for COVID-19, and some companies, such as Moderna, are seeing massive gains after reporting positive results. 

How to invest in biotech

The key point to keep in mind when looking at biotech investing is accurately gauging risk tolerance. Biotech is a volatile place to invest in the best of times, and these are not the best of times. Companies spend years and billions of dollars developing treatments, and the reality is that not every treatment works or is approved. 

Investors interested in the massive potential of biotech would do well to do their homework and honestly assess their appetite for wild price swings. Biotech looks to have a bright future, and the industry does have a history of beating the market, but it is important to understand that it comes at the cost of high volatility.

That’s why investing in a biotech-focused ETF or mutual fund is a good way to gain exposure to this growing but volatile sector. A search on Magnifi suggests there are a number of different ways for investors to do this.

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