Four ETF Plays for Biotech
Last week a number of biotech players, including Millipore(MIL), OSI Pharmaceuticals(OSIP), Intermune(ITMN) and Sequenom(SQNM) (SQNM) turned in double-digit gains in the volatile health care subsector.
While last week’s performance was impressive, it pales in comparison to Human Genome Sciences’(HGSI) gains over the past year. Today, the stock trades at over $30, more than 5,000% higher than a year ago.
The most notable single-day boost for this company occurred on July 20 when the stock jumped 276% after reporting strong results for its highly anticipated Lupus drug.
On the other side, health care stocks do fall, leaving investors with a bitter taste. For example, when Medivation’s(MDVN) Alzheimer’s drug failed in a late-stage trial last week, shares of the firm fell over 65% in a single session.
Given such violent swings, ETF companies have adopted some unique approaches for investors in the biotech industry.
Though there a number of biotech ETFs, three — SPDR S&P Biotech(XBI), iShares Nasdaq Biotech(IBB), and First Trust NYSE Arca Biotech(FBT) — stand out for their huge size and liquidity. Deciding on which to invest in depends on a person’s investing goals.
Conservative investors looking for a stable play on the biotech industry should turn to IBB. IBB has assets weighted toward the largest companies in the industry, such as Amgen(AMGN) in the top spot, with 10.2% of assets, followed by Gilead(GILD), with 8.1%, and Teva Pharmaceutical(TEVA), with 7.9%.
By tracking such large firms, the instrument is far are less susceptible to violent movements that smaller industry players are susceptible to.
Though stability may appeal to risk-adverse individuals, IBB may prove to be too reserved for those looking for more pop. Investors looking for more dramatic swings will find FBT or XBI to be more to their liking.
Rather than tracking the strongest, most stable biotech companies, these funds employ an equal-weighted strategy across biotech firms of all sizes. This strategy allows investors to internalize large gains while avoiding bloated exposure to any single firm that may be a big flop.
The difference between these two strategies can be seen by their weightings in a firm like HGSI. IBB lists this company as a minor holding, accounting for less than 2%. By comparison the firm plays a more important role in FBT and XBI where it represents 5% and 4% respectively.
FBT’s index is comprised of 20 companies, including such top holdings as SQNM, OSIP and MIL, which account for 21% of the fund.
Out of the 26 companies in XBI, the top players include: OSIP, Incyte(INCY) and Dendreon(DNDN), which collectively account for 15% of the fund.
Though investors can gain ample exposure to the biotech industry using either FBT or XBI alone, playing them together will provide access to an even broader array of companies. The two funds share a number of identical holdings, but investors can gain access to 34 companies by including both in a single portfolio.
So far in 2010, FBT and XBI have outperformed their market-cap-weighted cousin, IBB. Given the equal-weighted nature of these two funds, I expect this type of performance to continue into the future.
