The Definitive Biotech ETF Guide (IBB, XBI, FBT)
Lifted by new drug approvals along with increased mergers and acquisitions activity and a churning rumor mill to that effect, biotechnology stocks have been stellar performers in 2012. Earlier this month, S&P Capital IQ cited those catalysts as reasons for the biotech group's sharp year-to-date outpacing of the broader market.
"We see an improving trend for FDA first cycle review approvals, and a rise in the rate of new drug approvals for rare diseases. We think these trends are helping to boost investor sentiment toward the agency, after years of criticism stemming from its inconsistency in making and communicating its decisions. New drugs approved in 2011 included novel approaches to managing such diseases as auto-immune disorder lupus and chronic hepatitis C virus. In early 2012, FDA approved a new treatment for rare respiratory disease cystic fibrosis, months ahead of its scheduled action date. We are encouraged by the progress of additional treatments that we see having potential to further advance treatment options for hepatitis C and cystic fibrosis," S&P said in a research note.
Good news indeed, but as is the case with other sectors that have multiple ETFs tracking them, there are differences among the various biotech ETFs that investors need to be aware of before rushing into. We examine those differences here in Benzinga's Definitive Guide to Biotech ETFs.
iShares Nasdaq Biotechnology ETF (Nasdaq: IBB) The iShares Nasdaq Biotechnology ETF is the largest biotech ETF by assets with almost $1.9 billion in AUM. Home to 118 stocks, IBB features an expense ratio of 0.48%. While that roster of nearly 120 stocks would appear to make IBB an excellent play on the aforementioned biotech catalysts, it should be noted that the ETF's top-10 holdings represent over 54% of the fund's total weight.
Beyond that, biotech's Big Four – Amgen (Nasdaq: AMGN), Gilead (Nasdaq: GILD), Celgene (Nasdaq: CELG) and Biogen (Nasdq: BIIB) – account for over a quarter of IBB's weight. Additionally, investors should note nearly 30% of IBB's weight goes to pharmaceuticals firms, not pure-play biotech names. We're not bashing IBB; it is up 15% year-to-date, but bigger doesn't always mean better among sector funds.
SPDR S&P Biotech ETF (NYSE: XBI) XBI is smaller than IBB in terms of holdings (48) and assets $558.3 million), but the SPDR offering is also cheaper at 0.35%. The aforementioned dominant biotech quartet are featured in XBI, but nearly to the degree of prominence they have in IBB. Only Biogen is featured among XBI's top-10 holdings and overall, those stocks account for less than 13% of XBI's total weight.
No single stock receives an allocation of more than 4.8% in XBI. Given the ETF's focus on biotech firms that are far smaller than the Big Four, this ETF is arguably more levered to the new drug approval cycle and perhaps increased M&A activity as well. XBI has slightly outperformed IBB year-to-date.
First Trust NYSE Arca Biotech Index Fund (NYSE: FBT) By number of holdings (20) and AUM ($248.2 million), the First Trust NYSE Arca Biotech Index Fund is obviously far smaller than its iShares and SPDR rivals. With annual fees of 0.6%, it's also pricier, but the good news is by paying up a bit for FBT, investors have been rewarded with superior performance. As in FBT is up almost 30% year-to-date.
FBT's top-10 holdings include Vertex Pharmaceuticals (Nasdaq: VRTX), Incyte (Nasdaq: INCY), Affymetrix (Nasdaq: AFFY) and Amylin Pharmaceuticals (Nasdaq: AMLN), making it one of the more volatile ETF options in a sector known for its volatility. On the upside, FBT is intimately correlated to new drug approvals and M&A chatter.
Market Vectors Biotech ETF (NYSE: BBH) This new version of the old Biotech HOLDRs fund is fair in terms of expenses (0.35%) and features more stocks than FBT with 26. However, it must be noted that the Big Four dominate this fund, combing for over 43% of BBH's overall weight. Amgen and Gilead combine for over 26%. That hasn't hampered BBH's year-to-date returns as the fund is higher by more than 23%. Overall, this would be a middle of the pack biotech fund if we were giving each fund a grade.
PowerShares Dynamic Pharmaceuticals Portfolio (NYSE: PJP) The PowerShares Dynamic Pharmaceuticals Portfolio gets an Overweight rating from S&P Capital IQ and perhaps more than any of the other funds on this list, this one holds appeal to truly conservative investors. We say that because along with Amgen and Gilead, PJP's top-10 holdings include stocks such as Abbott Labs (NYSE: ABT) and Pfizer (NYSE: PFE).
Not surprisingly, the blue-chip pharmaceuticals exposure has suppressed PJP's returns relative to the other funds mentioned here, but that also makes for a less volatile option.
PowerShares Dynamic Biotechnology & Genome Portfolio (NYSE: PBE) This $129 million fund, which features an expense ratio of 0.63%, is more a of biotech pure-play. At the same time, PBE probably isn't for the faint of heart as small-caps account for 52% of the fund's weight. Small-caps of all stripes are being sent to the woodshed in the current market environment and that explains why PBE is clinging to a year-to-date gain of less than 5%.
PowerShares S&P SmallCap Health Care ETF (Nasdaq: PSCH) While it should be noted that PSCH isn't 100% allocated to small-caps (mid-caps chime in at about 16% of the total weight), the exposure to low market cap stocks explains the fund's recent struggles and the fact that with a year-to-date gain of just 3%, this is the worst-performing ETF on our list.
Salix Pharmaceuticals (Nasdaq: SLXP), Cubist Pharmaceuticals (Nasdaq: CBST) and Questcor Pharmaceuticals (Nasdaq: QCOR) are found among the top-10 holdings and in this ETF's defense, it is home to several credible takeover targets. Be careful if this fund trades below $31.
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