Biotech Hedge Funds are hot, but Biotech ETFs are Hotter

It is no secret that investors love biotechnology stocks and the related exchange traded funds. That love extends to hedge funds, some of which are dedicated healthcare and biotech funds.

Hedge funds that focus exclusively on biotech or invest in the space as part of a diversified healthcare strategy have delivered tidy returns for investors in recent years even as other hedge funds have struggled to keep pace with the S&P 500.

“Hedge funds that focus on biotech or invest in the sector as part of a broader health-care portfolio have produced average gains of 20.87 percent over the last five years,” reports Lawrence Delevingne for CNBC, citing an analysis of 50 funds by Simplify, which tracks hedge fund return data and consults on risk management.

An average annual return of nearly 21% over five years is nothing to scoff and hedge funds have accomplished those returns by embracing a broad swath of biotech names ranging from small-caps to goliaths. A recent Goldman Sachs survey of hedge funds’ favorite stocks includes biotechs such as Pharmacyclics (NasdaqGS: PCYC) and Gilead Sciences (NasdaqGS: GILD). [ETFs for Biotechs Loved by Hedge Funds]

Those names and hundreds of others are easily accessed via an array of biotech ETFs, an asset class that has generated vastly superior returns over the past five years compared to biotech or healthcare hedge funds.

Over the past five years, the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB), which tracks the Nasdaq Biotech Index, and the SPDR S&P Biotech ETF (NYSEArca: XBI), the third-largest biotech ETF by assets have returned an average of 350%. The First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT) is up almost 289% over that period. [Biotech ETFs for the Long Term]

For the five years ended May 28, 2015, the compound annual growth rate (CAGR) for the five largest biotech ETFs – IBB, FBT, XBI, the Market Vectors Biotech ETF (NYSEArca: BBH) and the PowerShares Dynamic Biotechnology & Genome Portfolio (NYSEArca: PBE)smokes the nearly 21% returned by biotech and healthcare hedge funds.