Biotechnology investors remain confident in the sector’s outlook even after a major comeback this year — and they’re picking their positions. The healthcare subsector has quietly become one of the most compelling opportunities this year, with the two biggest exchange traded funds tied to the group rallying. The State Street SPDR S & P Biotech ETF (XBI) has surged nearly 80% over the past 12 months, while the iShares Biotechnology ETF (IBB) has gained more than 40%. The S & P 500 is up about 19% over the same span. Investors who enjoyed the run-up in biotech remain positive on the outlook, given that large pharmaceutical companies face fast-expiring patents that could lead to a pick-up in merger and acquisition activity. A recovery in clinical trial activity, as well as an easier regulatory backdrop, is also supportive of the group. “M & A is always a very important driver for us, and we do think it will continue,” said Evan McCulloch, lead portfolio manager of the Franklin Biotechnology Discovery Fund ( FBDIX ). XBI YTD mountain State Street SPDR S & P Biotech ETF, YTD performance Top performer FBDIX has been in the top-performing quartile of funds in its category on a 1-, 3-, 5- and 10-year basis, according to Morningstar. The fund has a 1.02% adjusted expense ratio. McCulloch said the fund has performed closer to its benchmark in 2026, with FBDIX up more than 18%, after soaring more than 50% in 2025. But McCulloch, who has led the fund since 2000, is hopeful that it will do better in the second half of this year, when he’s expecting key data from some of his portfolio holdings, as well as some major product launches. McCulloch is especially optimistic on Revolution Medicines . Shares of the clinical-stage oncology company have more than doubled already this year, up 130%, after a drug developed for pancreatic cancer succeeded in a Phase 3 trial . RevMed found that its daily pill, daraxonrasib, doubled the length of survival and lowered the risk of death by 60% compared to conventional chemotherapy. The company is now preparing for FDA approval of the drug. “I can’t go a day without someone asking me about that,” said McCulloch, who started at Franklin Templeton after graduating UC Berkeley in 1992. “So, you know that’s going to be a very important launch. It’s practically a shoe-in for approval.” RevMed was the seventh largest holding in FBDIX, accounting for 3.1% of the fund, as of June 30. Jazz Pharmaceuticals and Amgen are the fund’s top two holdings, accounting for a combined 9.9%. Picking positions After the runup, however, McCulloch is choosing his positions more carefully in the second half of the year, now that much of the group, especially midcap stocks, look more fairly priced. There are other risks, as well, such as where the Federal Reserve goes next with interest rates. Matt Bartolini, global head of research strategists at State Street Investment Management, warned investors there could be more volatility ahead in biotechs. The State Street SPDR S & P Biotech ETF ( XBI ) has outperformed this year, up more than 25%, thanks to an equal weighting of stocks that captured the broad-based improvement in biotech. But the XBI is also highly volatile, with a one-year standard deviation of 19%. That’s more than S & P 500 at around 13%, or the broad health care sector at 16%. Regardless, Bartolini noted that improving M & A trends continue to be constructive for the group, especially as it remains a key beneficiary of artificial intelligence. Douglas Yones, chief executive at Direxion, a financial services firm known for offering specialized, index-based exchange-traded funds, identified biotech as a key area of interest for his firm as it hunts for sectors that stand to benefit most from AI. “We’re just entering a geometric growth rate of what we can expect to see out of the healthcare and pharma and biotech industry,” Yones said. “And so we’re big believers in the growth of that space for the next five to 10 years.”
