BBH: This ETF Provides Robust Returns To Investors In The Biotech Sector

Sep. 26, 2021 5:01 AM ETVanEck Biotech ETF (BBH)

Summary

  • VanEck Vectors Biotech ETF is a biotech centric ETF with passive investment approach.
  • The fund invests in a small number of biotech companies.
  • The lack of diversification may be a cause of concern for some investors.
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Wooden cubes building word ETF (abbreviation of Exchange Traded Fund) on light blue background
Nastassia Samal/iStock via Getty Images

VanEck Vectors Biotech ETF (NASDAQ:NASDAQ:BBH) is a biotech focused ETF which aims to mimic the composition and performance of the MVIS US Listed Biotech 25 Index. The fund parks its holdings in companies engaged in developing, producing and selling genetic therapies and equipment. This decade old fund has offered steady growth and has been able to withstand pandemic situation. Let's have a look at the current situation of VanEck Vectors Biotech to see whether it can act as a viable addition to a portfolio or not.

The Holdings

Like any other fund, VanEck Vectors Biotech is also dependent upon its constituents to provide return to its investors. In order to evaluate an ETF, it is important to look at its holdings and various related aspects. As per the fund's memo, it aims to invest in companies which are not only industry leaders but are also highly liquid. Further, the fund also seeks to diversify its portfolio by investing in both the US as well as foreign companies listed on the US bourses.

The fund's entire holding is invested in the healthcare segment. As of August 2021, the fund holds stake in 24 companies. It is a concentrated fund as its top 10 percent holdings account for nearly 60 percent of its portfolio. The top honor goes to Moderna Inc. (MRNA) which has bagged 9.3 percent of the fund's holdings while Amgen Inc. is second with 7.97 percent of the total portfolio. Some of the other important constituents of the portfolio are Gilead Sciences Inc. (GILD), Illumina Inc. (ILMN) and Novavax Inc. (NVAX).

Overall, it is clear from the composition of the fund that it is a highly targeted investment tool. While it attempts to bring about a modicum of diversification to its portfolio, VanEck Vectors Biotech is mainly targeted towards investors with specialized knowledge of healthcare sector and looking to leverage such knowledge for generating alpha. This thesis is further underscored by the fact that the fund has created positions in the companies with solid foundations, thus ensuring that it has invested in high quality stocks. While it helps in reducing the risk quotient of the fund, it also helps in keeping volatility at the manageable levels.

The Performance

VanEck Vectors Biotech is a passive ETF which means that it aims to match the performance of its benchmark by following its composition and investment pattern. Some of the main metrics which may be used for gauging the performance of an ETF are its Net Assets Value and Market Value of its units. The market value of the fund may be lower or higher than its NAV. The fund is considered to be trading at premium if it is trading above its NAV while in the opposite case, it is deemed to be trading at discount. This rule is generally used for the purpose of determining appropriate entry and exit points. Following table shows the Discount/Premium trend for the firm which may be utilized for making informed decisions.

Source: Company Website

So let's first have a look at the fund's NAV performance. For Year to Date, the fund has offered 27.33 percent growth in its NAV while for a year, the growth stood at 35.03 percent. The fund's lifetime growth in NAV stands at 20.88 percent per annum. Another metric to look at is the growth in its market price. On this front, VanEck Vectors Biotech has achieved 27.36 percent growth on Year to Date basis and 35.18 percent growth in one year. The fund's performance is in line with the performance shown by the benchmark as expected.

Source: Company Website

Investment Thesis

As noted earlier, VanEck Vectors Biotech is a highly specialized fund with focus on companies in biotech segment. This factor exposes the fund to the whims and fancies of the sector. As the fund is not diversified in other segments, any upheaval in biotech sector may have amplified impact on the performance of VanEck Vectors Biotech. This may pose as a significant risk factor for an investor. However, specialized ETFs such as VanEck Vectors Biotech are mainly targeted towards investors who are looking to leverage such targeted approach. VanEck Vectors Biotech also mitigates the risk by carefully selecting its constituents.

VanEck Vectors Biotech may prove to be a highly lucrative addition to any portfolio consisting of other specialized funds. In such a case, the fund may provide diversification to the portfolio where there is already representation of other sectors. It is also suitable for investors who otherwise have intricate knowledge of the segment and seek to benefit from that by participating in a targeted fund. VanEck Vectors Biotech also has strong track record of dividend distribution, providing steady income stream to its investors, in addition to capital growth.

Passive funds also tend to have lower fees and expenses than actively managed funds, thus adding to the net return to the investors. Besides, overall performance of VanEck Vectors Biotech has been robust, making it an interesting investment choice. As these funds do not try to upend benchmark index, they do not run the risk of treading aggressively and making poor selection calls. In this way, these funds provide security and sharp focus.

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