Biotech ETFs Are Outperforming The S&P 500

 |  Includes: ALXN, IBB, ONXX, SPY, XBI
by: David Zanoni

The Biotech sector offers investors an opportunity to benefit from growing companies with necessary treatments for various health conditions. Individually, the stocks of these companies can be highly volatile. However, Biotech ETFs offer a less risky investment vehicle to reap the benefits of these promising companies. By owning a basket of biotech companies, these ETFs smooth out the volatility while simultaneously outperform the S&P 500 (NYSEARCA:SPY). This significantly outperformed the S&P 500's performance of 6.4% for 10 years, 13.5% for 5 years, and 13.39% year-to-date.

iShares Nasdaq Biotechnology (NASDAQ:IBB) seeks to match the results of the Nasdaq Biotechnology Index Fund. The fund is comprised of 72.6% Biotech, 27.25% Pharmaceuticals, and 0.16% S-T Securities. It has achieved an annualized return of 9.93% for the past 10 years. However, its 3-year annualized return was a generous 21.68% and its year-to-date return has been a stellar 30.91%.

Top 10 Holdings:


% of Fund

Alexion Pharmaceuticals (NASDAQ:ALXN)


Regeneron Pharmaceuticals (NASDAQ:REGN)




Gilead Sciences (NASDAQ:GILD)


Celgene Corporation (NASDAQ:CELG)


Biogen Idec (NASDAQ:BIIB)


Vertex Pharmaceuticals (NASDAQ:VRTX)


Perrigo Co. (NASDAQ:PRGO)


Onyx Pharmaceuticals (NASDAQ:ONXX)


Mylan Inc. (NASDAQ:MYL)


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This is a great mix of companies. These businesses provide various life-transforming treatments for many areas of medicine such as oncology, neurology, inflammation, cardiovascular, respiratory, hemophilia, auto-immune disorders, and more.

The fund does pay a modest yield of 0.17% and has an expense ratio of 0.48%.

SPDR S&P Biotech (NYSEARCA:XBI) seeks to replicate the performance of the S&P Biotechnology Select Industry Index. The fund invests at least 80% of total assets into the companies that are a part of the index. XBI has achieved an annualized performance of 10% for the past five years, 17.84% for the past 3 years, and 33.48% year-to-date. The fund has an expense ratio of 0.35%.

Here are the top 10 holdings in the XBI fund:


% of Fund

Onyx Pharmaceuticals


Pharmacyclics Inc. (NASDAQ:PCYC)


Affymax (OTCPK:AFFY)


Arena Pharmaceuticals (NASDAQ:ARNA)


Ariad Pharmaceuticals (NASDAQ:ARIA)


Gilead Sciences


United Therapeutics (NASDAQ:UTHR)


Alkermes plc (NASDAQ:ALKS)


Alexion Pharmaceuticals


Medivation (NASDAQ:MDVN)


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This is another great combination of biotech companies offering a variety of treatments for numerous conditions. This fund does not pay a dividend, but it is concentrated with high-growth biotechnology companies with strong stock growth performance.

XBI has an average PE ratio of 23.77%. The stocks comprising the fund have an average 3 to 5 year expected annual earnings growth of 26.07%.

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Biotech Outlook

The outlook for biotech remains strong. The strength of the companies in these funds lies in the sales and earnings of their approved drugs and the potential of the drugs under development in the pipeline. M&A activity among biotechs adds another catalyst to the mix for this bullish case.

Investing money in biotechs is a way to participate in the improvement of the lives of many individuals. These companies innovate with real solutions for serious health conditions. With the aging baby boomer demographic, the biotech sector is sure to thrive for the long-term and continue to beat the S&P 500.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.