It has been said time and again that health care is the S&P 500’s top-performing sector this year. So strong has the sector been that at one point in late November, eight of the top 10 non-leveraged sector ETFs on a year-to-date basis were health care funds.
Due in part to a recent push by real estate investment trusts (REITs), the number of health care ETFs on the top 10 sector fund list has dwindled to five. Not surprisingly all of those are biotech funds and perhaps not surprisingly, that quintet is led by the First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT). [Behind the Dominance of Health Care ETFs]
FBT has surged almost 46% this year while pulling in $565 million of its $1.95 billion in assets under management. Among the major biotech ETFs, FBT’s 2014 inflows are surpassed only by theiShares Nasdaq Biotechnology ETF (NasdaqGM: IBB). IBB is the largest biotech ETF.
While all biotech ETFs have benefited this year from a spate of Food and Drug Administration approvals and a wave of mergers and acquisitions, FBT has frequently found itself at the right place at the right time.
Early this year, UBS highlighted sees Incyte (NasdaqGM: INCY), Medivation (NasdaqGM: MDVN), Idenix Pharmaceuticals Inc. (NasdaqGM: IDIX), Insmed Inc. (NasdaqGM: INSM), InterMune Inc. (NasdaqGM: ITMN), Puma Biotechnology(NYSE: PBYI) and Vertex Pharmaceuticals (NasdaqGM: VRTX) as possible takeover candidates. [The Right ETF for Biotech Takeover Targets]
The ETF currently allocates combined 11% of its weight to Incyte, Medivation and Vertex. Considering FBT holds just 30 stocks with none occupying a weight north of 4.5%, that is impressive leverage to potential takeover targets.
Since the start of the year, FBT has benefited from positive news from Vertex’s Phase III trials for its cystic fibrosis treatment, Puma confirming its experimental breast cancer treatment, neratinib, proved successful in a Phase III trial, Roche’s acquisition of InterMune and, most recently, Dow component Merck (NYSE: MRK) announcing it will acquire Cubist Pharmaceuticals (NasdaqGS: CBST) for $9.5 billion. [Cubist Deal Lifts a Biotech ETF]
At the time the Merck/Cubist deal was announced, FBT was the only biotech ETF with decent exposure to Cubist and the stock is now the ETF’s largest holding at 4.5%.
This will be the second time in the past three years that FBT has ranked among the top 10 sector ETFs on an annual basis. Combine that with the ETF’s P/E ratio of 28.2 and price-to-book ratio of 7.45 and it is not unreasonable to expect FBT and rival biotech ETFs will face more valuation criticism heading into 2015.
That criticism drove biotech ETFs down late in the first quarter and into the second quarter this year, but the end was result was the funds eventually moving to all-time highs. However, with biotech entering its seasonally strong period and expectations in place that 2015 will be another strong year on the M&A front, late comers may still be able to reap solid profits on FBT.
First Trust NYSE Arca Biotechnology Index Fund
