For those investors not keen on spending countless hours pouring over financial statements and company profiles, not to mention the confusing scientific and technical jargon that biotech companies harbor in their annual reports, Exchange Traded Funds [ETFs] may be the better choice for investing in the biotechnology industry.
There are currently five popular biotech ETFs, each differing by the number of stocks held and the indices mirrored.
These five include: SPDR Biotech ETF (NYSEARCA:XBI), PowerShares Dynamic Biotech & Genome (NYSEARCA:PBE), IShares NASDAQ Biotechnology (NASDAQ:IBB), First Trust AMEX Biotechnology (NYSEARCA:FBT), and finally the Biotech HOLDRs (NYSEARCA:BBH).
BBH holds the least number of stocks, currently 18 as last reported by Yahoo!Finance. This is inadequate for an investor seeking a generalized representation of the biotech industry. 38% of the total holdings is taken up by Genentech (Private:DNA) while another 25% is held in Amgen (NASDAQ:AMGN). That is more than 60% held in only two stocks! While biotechs held by BBH tend to be the largest in market cap of all the biotechs, there still remains much room for lowering the risk. Imagine if Genentech or Amgen suddenly drop in price, no matter the reason, BBH will take a much larger hit than the rest of the biotech ETFs.
While FBT also holds a small number of stocks, (it is currently at 20 to mirror the AMEX Biotechnology Index,) its assets are more evenly distributed. No more than 6% is held in any one stock. In fact, the top 10 held stocks differ within a range of 1%. However, FBT carries riskier stocks in its top 10, such as Human Genome Sciences (HGSI) and Millennium Pharmaceuticals (MLNM), both of which have historically not lived up to their potential.
IBB holds 176 total stocks, by far the most number of stocks of any biotech ETF. It follows the NASDAQ Biotechnology Index. Amgen takes up more than 15%, and is the top holding. The second top holding however is less than half with 6% held in Gilead Sciences (NASDAQ:GILD). Even though this ETF holds some of the riskiest little biotech stocks on the market it is generally the safest investment as the risk is diluted substantially. IBB also accurately mirrors the entire publicly traded biotech industry as the NASDAQ holds almost the entire field of stocks. Investors however lose out on the father of biotech stocks, Genentech, as it currently does not trade on the NASDAQ. Investors could easily invest in Genentech stock separately if desired.
PBE is intriguing and is relatively new. It is intriguing because its top 10 holdings are mixed, with larger capped big biotechs and smaller riskier ones. The top holdings include biotech stars such as Gilead Sciences, Amgen, and Genentech, while also carrying the smaller Human Genome Sciences and Bruker Biosciences (NASDAQ:BRKR). PBE holds over 30 stocks in total and is an interesting way to invest in a moderately risky sample of the biotech industry.
Finally, there is XBI, which currently holds over 30 stocks and follows the S&P Biotechnology Industry Select Index. This ETF by far carries some of the best performing companies. Its top 10 holdings include such top performers as Cephalon (NASDAQ:CEPH), Gilead Sciences, Celgene (NASDAQ:CELG), and OSI Pharmaceuticals (OSIP). These are in addition to the biotech giants Genentech and Amgen. XBI makes a great biotech ETF for its quality holdings, and its risk distribution as the top holding is only 0.3% larger than the 10th holding.
Here is a quick look at the top 10 holdings in each:
SPDR Biotech ETF (XBI)
CEPHALON INC (CEPH) 3.83%
ALKERMES INC (NASDAQ:ALKS) 3.69%
GILEAD SCIENCES (GILD) 3.66%
CELGENE CP (CELG) 3.63%
GENENTECH INC (DNA) 3.62%
AMGEN (AMGN) 3.55%
OSI PHARMACEUTIC (OSIP) 3.54%
ICOS CP (ICOS) 3.53%
BIOGEN IDEC INC (NASDAQ:BIIB) 3.52%
VERTEX PHARMACEUT (NASDAQ:VRTX) 3.50%
PowerShares Dynamic Biotech & Genome (PBE)
GILEAD SCIENCES (GILD) 5.25%
APPLERA CORP-APPLIED (NYSE:ABI) 5.2%
WATERS CP (NYSE:WAT) 5.17%
AMGEN (AMGN) 5.12%
SIGMA ALDRICH CP (NASDAQ:SIAL) 5.08%
GENZYME CORPORATION (GENZ) 5%
GENENTECH INC (DNA) 4.99%
BIOGEN IDEC INC (BIIB) 4.87%
HUMAN GENOME SCI (HGSI) 2.95%
BRUKER BIOSCIENCES (BRKR) 2.94%
IShares NASDAQ Biotechnology (IBB)
AMGEN (AMGN) 15.36%
GILEAD SCIENCES (GILD) 6.04%
CELGENE CP (CELG) 4.51%
TEVA PHARM INDS AD (NASDAQ:TEVA) 3.91%
BIOGEN IDEC INC (BIIB) 3.51%
GENZYME CORPORATION (GENZ) 3.42%
VERTEX PHARMACEUT (VRTX) 2.66%
MEDIMMUNE INC (MEDI) 1.64%
SEPRACOR INC (SEPR) 1.53%
SHIRE PLC ADS (SHPGY) 1.49%
First Trust AMEX Biotechnology (FBT)
Myogen, Inc. 6.13%
HUMAN GENOME SCI (HGSI) 5.78%
ICOS CP (ICOS) 5.55%
PDL BIOPHARMA INC (NASDAQ:PDLI) 5.52%
GILEAD SCIENCES (GILD) 5.46%
MEDIMMUNE INC (MEDI) 5.45%
GENENTECH INC (DNA) 5.03%
AMGEN (AMGN) 4.97%
BIOGEN IDEC INC (BIIB) 4.96%
GENZYME CORPORATION (GENZ) 4.93%
Biotech HOLDRs (BBH)
GENENTECH INC (DNA) 38.29%
AMGEN (AMGN) 25.38%
GILEAD SCIENCES (GILD) 11.52%
BIOGEN IDEC INC (BIIB) 6.71%
GENZYME CORPORATION (GENZ) 4.94%
APPLERA CORP-APPLIED (ABI) 3.51%
MEDIMMUNE INC (MEDI) 2.51%
SHIRE PLC ADS (SHPGY) 2.01%
SEPRACOR INC (SEPR) 1.62%
MILLENNIUM PHARM (MLNM) 0.73%
XBI, PBE, IBB, FBT, BBH 1-yr chart: