2 Brilliant Biotech ETFs to Watch in 2026

• The iShares Biotechnology ETF is up over 32% in six months on rate cut expectations and potential sector rotation.

• The State Street SPDR S&P Biotech ETF has surged 45% in six months but remains 27% below its peak.

• Biotech valuations remain modest despite outperforming the S&P this year.

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As the AI trade gets overheated and calls for some sort of bursting of the AI bubble grow louder, it might make sense to look to opportunities to be had within other sectors. Undoubtedly, the AI-fuelled tech boom may very well continue for another year or more, as the firms strive to be among the first to achieve some form of artificial general intelligence (AGI). Still, there’s no denying that the stakes are higher, along with valuations.

For investors seeking momentum beyond the AI trade, the biotech scene is starting to look interesting again after a strong year of recovery gains and a potential stage set for a year-end breakout. And given the lower degree of correlation to what’s powering the AI names higher, growth-focused investors might wish to give some of the long-forgotten biotech ETFs a second look.

Despite the newfound momentum, there are still great relative value plays, and, in this piece, we’ll check out a pair of names worth watching in the coming weeks and months.

The iShares Biotechnology ETF (NASDAQ:IBB) is really starting to pick up traction, now up over 32% in the last six months, thanks in part to high hopes for low rates (the biotechs are quite capex-heavy businesses) and perhaps a rotation into some of the less economically-sensitive growth names. With the Federal Reserve recently cutting rates again while hinting at a slower pace from here, the biotech basket might require other catalysts to experience a much-awaited breakout to new highs.

If we are on the cusp of a rise in M&A activity, the biotech scene could certainly benefit from a bit of industry consolidation. Add the effect of AI on drug discovery into the equation, and perhaps it’s still a great time to be a net buyer of the names, especially considering valuations remain quite reasonable. On the whole, biotech valuations were overly cheap going into the year, but even after an S&P-beating year, they still seem to be modest.

Either way, the iShares Biotechnology ETF is one of the better ways to play the brilliance of the biotechs going into the new year. The ETF has a good mix of large-caps and mid-caps, but is quite top-heavy, making it an intriguing bet for investors seeking a perfect mix of defensive growth and slightly less volatility than the broad market (0.96 beta).

For investors seeking more growth and broader exposure to the lesser-known mid-caps, the State Street SPDR S&P Biotech ETF (NYSEARCA:XBI) is a great choice. Of course, you’re going to get a more turbulent ride, but for investors seeking to capitalize on a small-cap surge, I am a big fan of the ETF. Shares of the State Street SPDR S&P Biotech ETF are up a scorching 45% in the past six months.

Lower rates are a bigger deal for the smaller, up-and-coming biotechs, especially those that aren’t too (if at all) profitable in the present. Despite the sudden surge, the ETF is still down around 27% from its highs, making a breakout still a way away. For those comfortable with more correlation to the S&P (1.38 beta) and choppier moves, the broader State Street SPDR S&P Biotech ETF might be the right pick to go with.

Personally, I think there’s a strong case for owning the iShares Biotechnology ETF and the State Street SPDR S&P Biotech ETF together. You’re covering both bases, with a larger chunk allocated towards blue chips with the former and more elevated growth prospects with the latter. Either way, as rates continue to fall and AI looks to work its way into specific corners of biotech, I like the group and find them to be highly underrated.

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