Choosing the Right Biotech ETF Exposure | ETF Trends

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%.