We’ve mentioned before that not all exchange traded funds (ETFs) that cover a specific region or sector are created equal. Even if the stocks are similar, ETFs can behave differently. In funds
weighted by market capitalization, bigger companies tend to have more sway. In
equal-weighted funds, all companies have the same impact. They’ll do
better when the smaller ones shine. One sector that illustrates that point clearly is in biotechnology ETFs. Although these ETFs’ performance hasn’t been too exciting recently, they’re still worth watching. Let’s examine five biotech ETFs:
- SPDR S&P Biotech (XBI)
XBI is up 29.8% year-to-date. It’s top three holdings are Myriad Genetics (MYGN) at 3.6%, Biomarin Pharmaceutical (BMRN) at 3.4% and Alkermes (ALKS) at 3.5%. - PowerShares Dynamic Biotech & Genome (PBE)
PBE is up 11.6% year-to-date. It’s top three holdings are Imclone Systems (IMCL) at 5.7%, Amgen (AMGN) at 5.3% and Gilead Sciences (GILD) at 5.3%. - First Trust AMEX Biotechnology Index (FBT)
FBT is up 11.6% year-to-date. It’s top three holdings are Vertex Pharmaceuticals (VRTX) at 6.7%, Biogen Idec (BIIB) at 5.9% and Amylin Pharmaceuticals (AMLN) at 5.7%. - iShares Nasdaq Biotechnology (IBB)
IBB is up 11.3% year-to-date. It’s top three holdings are Amgen (AMGN) at 10.5%, Gilead Sciences (GILD) at 7.2% and Celgene (CELG) at 6.4%. - Biotech HOLDRs (BBH)
BBH is down 3.3% year-to-date. It’s top three holdings are Genentech (DNA) at 38.7%, Amgen (AMGN) at 20.7% and Gilead Sciences (GILD) at 15.1%
What should jump out at readers is how different the many of the holdings and their weightings are in the different biotech ETFs. That’s one factor behind some of the wide ranges of performance. Another factor is the bid-ask spread. As with stocks, there’s a difference between what a market maker will charge an ETF buyer and what that same dealer will pay a seller. The difference is the "bid-ask spread," and for investors, the smaller the spread, the lower the cost, reports Ben Levisohn for BusinessWeek. As a general rule, when an ETF sees little trading activity, bid-ask spreads can get wide.
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.