Biotech has had a huge run in 2012, and I wrote this article to examine the holdings of one of the most traded, and therefore most liquid ETFs. The iShares Nasdaq Biotechnology ETF (IBB) had a substantial increase as of that date of 40.7%, but two readers left comments and pointed out that three other ETFs performed better than the IBB.
I took a look at those funds and their year to date performance as of that date, October 3, 2012:
- Market Vectors Biotech ETF (BBH) - 53.1%
- First Trust NYSE Arca Biotech Index (FBT) - 45.5%
- SPDR S & P Biotech (XBI) - 42.3%
The commenters were correct, these other ETFs did outperform the IBB over the same period. As mentioned in the article, the IBB was heavily weighted to large capitalization biotechs, but that the weighting was not exactly in line with market cap.
The BBH does seem to be weighted by market cap, with Amgen (AMGN) the largest holding as of September 29 at 15.93% of the fund. This fund is very top heavy with large caps, as the top 10 holdings make up 71.84% of the fund.
The holdings in the XBI are much more spread over the vast spectrum of biotechnology stocks. The top 10 holdings represent only 30.53% of the fund as of September 27, 2012, and the top holding is Medivation (MDVN) a much smaller cap stock than AMGN, and which would have been even smaller if not for a 150% YTD gain over that period.
The FBT concentrates its holdings in just a few stocks. As of October 12, 2012, the fund only held 20 different companies, ranging from 3.16% to 6.32% of the fund. This makes it definitely an actively managed fund, in contrast to the BBH.
Long Term History and Liquidity
The analysis above is based on the year to date returns. Investors should also look at other time periods. An aggressive, actively managed fund will probably outperform during strong periods, and this year has been very strong for biotech in general.
Interesting, when longer term periods are examined, the IBB outperforms the FBT and XBI at three years, and the XBI at 5 years. The BBH is a newer fund without that track record.
The other feature of the IBB is liquidity. The IBB trades from 3 to 10 times as many shares as the other three choices, a volume that is likely to reduce the spreads on the stock and options.
The market is well served with several options for biotechnology ETFs. Investors need to look at more than just returns from one period and the holdings of the fund to make the best decision.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.