Three ETFs to Play the Outperforming Biotech Sector
August 19th 2013 at 4:39pm by Tom Lydon
The biotechnology sector has been one of the best performing areas in the market this year. While investors can try to bet big, and potentially lose big, on biotech stocks, an exchange traded fund helps diversify risk with a basket of securities.
“The jarring pace of change, single-product liability, regulatory uncertainties, and intellectual property rights make picking stocks in the biotech sector a high-risk/high-reward proposition,” according to Morningstar analyst Robert Goldsborough. “As such, we think investing in the industry via an ETF makes a lot of sense; it’s a low-cost way to gain diverse exposure to the industry in one trade.” [Biotech, Tech ETFs Could Lead Into Year-End]
The Market Vectors Biotech ETF (NYSEArca: BBH) is the best performing ETF for the sector, gaining 40.2% year-to-date.
BBH is more of a traditional market-cap weighted fund, tracking 25 of the largest U.S.-listed, publicly traded biotech companies. The ETF has a 0.35% expense ratio.
Top holdings include Gilead Sciences (NasdaqGS: GILD) 11.4%, Amgen (NasdaqGS: AMGN) 10.0%, Celgene (NasdaqGS: CELG) 7.5%, Biogen (NYSEArca: BIIB) 6.4% and Onyx Pharmaceuticals (NasdaqGS: ONXX) 5.9%.
The PowerShares Dynamic Biotechnology & Genome Portfolio (NYSEArca: PBE) has generated a 39.2% return year-to-date.
PBE tries to reflect the performance of the Dynamic Biotechnology & Genome Intellidex Index, which is a type of fundamental based index that includes companies based on investment criteria, like price momentum, earnings momentum, quality, management action and value. PBE has a 0.63% expense ratio.
Additionally, the PowerShares ETF has a equal-weight methodology – large-cap growth is 18.2%, mid-cap growth is 36.7%, small-cap growth is 42.0% and small-cap value is 3.1%. The top holding is Illumina (NasdaqGS: ILMN) at 5.1%, followed by Gilead 4.8%, Amgen 4.8%, Waters Corp (NYSE: WAT) 4.7% and Sigma-Aldrich (NasdaqGS: SIAL) 4.7%.
“Roughly half of this fund’s holdings are early-stage players with no drug on the market yet,” Goldsborough said in a note on PBE. “Would-be investors should note that because of the index’s equal-weight scheme, these smaller firms, with decidedly uncertain prospects but explosive upside potential, loom larger.”
The iShares Nasdaq Biotechnology ETF (NYSEArca: IBB) has gained 37.0% year-to-date.
IBB tries to reflect the performance of the Nasdaq Biotechnology Index, which tracks biotech and pharmaceutical companies. The fund has a 0.48% expense ratio.
The iShares ETF is the broadest in the biotech space, with 125 holdings. Looking at sub-sector breakdowns, biotech is 76.7% and pharma is 23.2%. As a market-cap weighted index ETF, giant-cap stocks make up 24.0% of IBB, large-cap is 22.4%, mid-cap is 32.9%, small-cap is 13.1% and micro-caps is 7.7%.
Top holdings include Celgene 8.1%, gilead 7.9%, amgen 7.9%, Biogen 6.6% and Regeneron Pharmaceuticals (NasdaqGS: REGN) 6.0%
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.