ETF Trends
ETF Trends

To put it delicately, 2014 has been an interesting and volatile year for biotechnology stocks and the exchange traded funds that hold those shares.

Biotech stocks usually trade at a hefty premium to the broader U.S. market, but earlier this year as the industry’s valuations became noticeably stretched relative to the group’s long-term averages, clarion calls regarding a biotech bubble grew louder.

The biotech boo birds eventually got their validation with the March/April momentum sell-off that sent some biotech ETFs into bear market territory. The First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT) was not immune to that sell-off, tumbling 19.7% from its February peak to its April trough. [Biotech ETFs Bumble Away Year’s Gains]

Like other biotech ETFs, FBT has since reclaimed a significant portion of its losses, surging 17.7% from its April bottom. That is also FBT’s year-to-date gain, 17.7%, and that is enough to have the ETF sitting atop all non-leveraged health care ETFs to this point in 2014, according to Dorsey Wright data.

FBT’s resurgence has been aided by the usual biotech catalysts, including FDA news and mergers and acquisitions rumors. For example, the ETF got a nice lift in June when shares of Vertex Pharmaceuticals (NasdaqGS: VRTX) surged more than 40% after the company said two Phase III trials for its cystic fibrosis treatment showed encouraging results. [Vertex Lifts Biotech ETFs]

At the time, FBT had the largest weight to Vertex among biotech ETFs with a 4.7% weight to the stock. FBT currently allocates 4.3% to Vertex, which does not sound like much, but remember no stock occupies more than a 6.3% weight in the ETF.

Some investors have responded to FBT’s durability. In the second quarter, FBT was the only one of the five biotech ETFs to see capital flow in as the fund added $50 million in new assets. Since the start of the third quarter, FBT has added $8 million in new assets, making it one of just two biotech ETFs to see inflows this quarter.

Investors that want some exposure to FBT without the commitment of owning the fund outright can acquire a partial positon in the fund via the First Trust Dorsey Wright Focus 5 Fund (NasdaqGM: FV).

FV holds five other First Trust sector funds with FBT being the largest weigh at 22.1%. The First Trust Health Care AlphaDEX Fund (NYSEArca: FXH), FV’s second-largest holding at over 20%, allocates nearly 15% of its weight to biotech stocks, indicating investors can use FV to gain solid biotech exposure without making a full bet on an individual stock or dedicated biotech ETF. [Momentum Rebound for This ETF]

First Trust NYSE Arca Biotechnology Index Fund