Choosing the Right Biotech ETF Exposure
April 20th 2012 at 3:09pm by Tom Lydon
Coming off the hopeful drug trial tests and lucrative takeover bids, the biotech sector and related exchange traded funds that follow the industry surged this week. However, some biotechnology ETFs are doing better than the others.
The large biotech firms are flush with cash and the overall sector is ripe with takeover bids on small up-and-comers with high potential. This was highlighted Thursday as Human Genome Sciences (NasdaqGS: HGSI) stock shares surged on a takeover bid from GlaxoSmithKline (NYSE: GSK). [Biotech ETFs Soar on Human Genome Bid, Gilead Drug Results]
Consequently, the SPDR S&P Biotech ETF (NYSEArca: XBI) rose 5% during trading hours Thursday and is up another 1.5% Friday. Since XBI follows an equal-weight methodology, smaller component holdings have an equal say in the portfolio’s overall performance, compared to large-cap weighted ETFs. As such, the fund received a solid boost from HGSI after the company’s stock jumped 100% on the takeover bid. Year-to-date, XBI is up 17.1%. The fund has an expense ratio of 0.35%.
First Trust Amex Biotechnology (NYSEArca: FBT), another equal-weight based ETF, also experienced significant gains following the takeover bid, especially with HGSI as its third largest holding at 7.0%. However, this fund is less diversified than XBI since it only holds 20 component stocks, compared to XBI’s 48. FBT is up 28.7% year-to-date. The fund has an expense ratio of 0.6%.
The iShares Nasdaq Biotechnology Index Fund (NYSEArca: IBB) offers a traditional cap-weighted exposure, with 118 holdings and the top ten accounting for 54.74% of the overall portfolio. The ETF is up 15.8% year-to-date. IBB has an expense ratio of 0.48%.
Market Vectors Biotech ETF (NYSEArca: BBH) also leans toward large- and mid-cap companies. With only 26 holdings, its top ten components make up 70.7% of the overall portfolio. The fund is up 21.6% year-to-date. BBH has an expense ratio of 0.35%.
Lastly, the Powershares Dynamic Biotech &Genome ETF (NYSEArca: PBE) offers an active, quantitative approach, based on certain investment criteria like price momentum, earnings momentum, quality, management action and value. PBE is up 8.1% year-to-date. The fund has an expense ratio of 0.65%.
If the current market conditions favor growth in large-cap stocks, it may be better to look to cap-weighted ETFs. For instance, in the technology sector, Apple (NasdaqGS: AAPL) makes up a significant portion of tech-based ETFs. However, for those who believe there are a bunch of small companies about to make it big, an equal-weight methodology may be a better play.
For more information on the biotech sector, visit our biotechnology category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.