XBI, Biotech Stocks Retreat: Buy, Hold or Sell?

This week has presented a challenging landscape for biotech ETF investors and advisors, as exchange-traded funds like the SPDR S&P Biotech ETF (XBI) faced headwinds from a confluence of political and economic factors. 

The unexpected appointment of Dr. Vinay Prasad to lead the FDA's Center for Biologics Evaluation and Research (CBER), coupled with disappointing company-specific clinical trial results and lowered sales outlooks, has injected a dose of regulatory and operational uncertainty into the industry. 

Adding more short-term pain to the biotech industry, the uncertainty arising from U.S. trade policy is problematic for mergers and acquisitions (M&A) activity, which is crucial to the industry’s growth. 

As biotech and the broader healthcare sector are common satellite holdings in broadly diversified portfolios, financial advisors and investors need to assess these developments while these market segments face short-term downside risk.  

Understanding the drivers behind this week's biotech pullback is crucial for revisiting current holdings and making informed decisions about future portfolio positioning within the healthcare and biotech spaces. 

XBI, Biotech Stocks Face Short-Term Headwinds

This week’s fall in biotech stocks and the XBI ETF appears to be primarily driven by the appointment of Dr. Prasad as the new director of the FDA's CBER.

Dr. Prasad, an oncologist and former professor, has a known history of criticism towards certain FDA approvals, particularly in areas like accelerated approval of cancer drugs, gene therapy and the Covid-19 response.

Analysts from William Blair and Jefferies noted that this appointment introduces "another round of FDA uncertainty" and could signal a more cautious regulatory environment for the biotech industry.

In addition to the broader regulatory concerns, specific company news also weighed on the sector. For example, Vertex Pharmaceuticals Inc. (VRTX), a top holding in XBI, saw a 10% drop Tuesday after pausing a cystic fibrosis clinical trial. 

While the FDA leadership news and specific company issues were the primary catalysts, the underlying macroeconomic uncertainty and trade war fears likely exacerbated the negative sentiment and contributed to the extent of the decline.  

XBI vs XLV: Growth vs Defense

The biotech sector is often categorized as a long-term growth investment due to its focus on innovation, the development of novel therapies and the potential for significant breakthroughs that can address unmet medical needs.

Tip: For deeper research, see etf.com's head-to-head XBI vs. XLV ETF comparison.

Biotech: Focused Growth

Companies within this sector are often characterized by high research and development spending and the potential for substantial revenue growth if their products gain regulatory approval and achieve commercial success. However, this growth potential comes with inherent risks, including clinical trial failures, regulatory hurdles and intense competition.  

Healthcare: Broad Diversification

Conversely, the broader healthcare sector is generally considered a defensive investment. Demand for healthcare services and products tends to be relatively stable regardless of the economic cycle. People will still require medical care, pharmaceuticals and medical devices even during economic downturns. This inelastic demand provides a level of resilience that makes healthcare stocks attractive during periods of uncertainty. 

XBI vs. XLV: Diverging Performance  

Interestingly, 2025 has presented a divergence in the performance of these two segments. The SPDR S&P Biotech ETF (XBI), which focuses specifically on a broad range of biotech companies, has underperformed the S&P 500 year to date.  

This underperformance, as seen in recent weeks, can be attributed to factors like regulatory concerns (as highlighted by the FDA leadership change), clinical trial setbacks and company-specific disappointments, which weigh heavily on the risk-oriented biotech sector. 

In contrast, broadly diversified healthcare ETFs like the Health Care Select Sector SPDR Fund (XLV) have outperformed the S&P 500 in 2025. XLV's broader exposure includes not just biotech but also pharmaceuticals, medical devices, healthcare services and insurance companies.  

This diversification provides a more defensive profile, benefiting from the steady demand within the overall healthcare industry and potentially offsetting some of the volatility experienced in the more speculative biotech segment.  

This mixed performance underscores the distinct characteristics of these two investment approaches within the healthcare landscape, calling for advisors and investors to assess their positions in this uncertain market and economic environment.