2 Biotech ETFs Differ Greatly in Constituents

Includes: BBH, PBE
by: Nick Perry

Nick Perry (Schaeffer's Investment Research) submits: The most important point to me in evaluating ETFs is to know what stocks make up the ETF and how those stocks are weighted. The best source of this information is usually found on sites run by the ETF families. The list below shows a few of the ones from my bookmarks that I find myself regularly visiting:

There are a number of sites that will give you the top components and their weightings, but the ones set up by the fund families are usually the most up to date and offer the most information. As far as sites for other ETF families, a quick Google search is usually all it takes.

The reason I think it is important to understand the component structure comes down to exposure and diversity. It can also help "explain" variances in performance. For example, consider a couple of ETFs from the biotech sector.

On a year-to-date basis, the Biotech HOLDRS (NYSEARCA:BBH) is down 8% while the PowerShares Biotechnology & Genome Fund (NYSEARCA:PBE) is up roughly 6%. A look to the structure of the two funds quickly shows a reason for the divergence. Genentech (Private:DNA) makes up a whopping 39% of the BBH, with Amgen (NASDAQ:AMGN) accounting for 21%. A look at the PBE's makeup shows that no single stock accounts for more than 6% of the weighting.

In other words, the action of the BBH is heavily (heavily!) influenced by the action of just 2 stocks while the PBE offers wider exposure to the sector. A more diverse weighting structure doesn't guarantee better performance, but it does give more even exposure to the stocks in the sector. Or looked at another way, if you are thinking about buying the BBH, you had better be sure you really like the prospects for Genentech.

While it may sound like I am favoring the PBE, that really isn't the case. My point is simply that you need to understand the ETFs. If you did have a strong belief in Genentech's prospects and liked the sector too, then you might find the BBH to be a good fit in your portfolio. The point is - it is important to know what you are getting into.