Rapid Fire Re-Balancing of ETFs into More Speculative Names
Is the Tail Wagging the Dog?
We have published a number of reports on Life Science ETFs (2/4/15) in the past and noticed changes lately that reflect a shift in the market from large cap to mid and smaller cap stocks. One example we noted was the huge moves in "theme" and MOmentum stocks such as CAR-T gene therapy. Over the past 5 months institutions have piled into names like: bluebird bio, Inc. (NASDAQ:BLUE), Juno Therapeutics (NASDAQ:JUNO), Kite Therapeutics (NASDAQ:KITE) and Ziopharm Oncology (NASDAQ:ZIOP). XBI also held Syngeva BioPharma Corp.(NASDAQ:GEVA) which soared 111% over 3 months due to its acquisition by Alexion (NASDAQ:ALXN).
Here is the major biotech ETF performance YTD and 5 years after the volatile ASCO period :
- First Trust NYSE Arca Biotechnology (NYSEARCA:FBT): 18.14%, 263% Market Cap $3.48B
- iShares NASDAQ Biotechnology Index (NASDAQ:IBB): 19.15%, 333% Market Cap $8.78B
- SPDR S&P Biotech (NYSEARCA:XBI) : 28.77%, 333% Market Cap $2.28B
- Over one year the five-star Fidelity Select Biotech Fund (MUTF:FBIOX) was up 34.9% underperforming all ETFs. In 2015 YTD the FBIOX tracked the performance of the FBT and IBB up about 19.6%.
What is interesting are the top ten holdings of these ETFs.
- The FBT was previously focused on large cap biopharmaceuticals. The Top Ten holdings now include many of the well known outperforming names such as Gilead Sciences (NASDAQ:GILD), Illumina (NASDAQ:ILMN), Incyte Corp. (NASDAQ:INCY), Regeneron Pharmaceuticals (NASDAQ:REGN) and Seattle Genetics, Inc. (NASDAQ:SGEN). But new holdings include mid and small caps that are big movers over the past 12 months: Agios Pharmaceuticals (NASDAQ:AGIO), Alnylam Pharmaceuticals (NASDAQ:ALNY), Celldex Pharmaceuticals (NASDAQ:CLDX), Exact Sciences (NASDAQ:EXAS) and Novavax, Inc. (NASDAQ:NVAX). Many of the new holdings are valued on their potential pipeline and future potential rather than actual revenues and are more mid-cap weighted.
- The IBB probably has changed the least with respect to portfolio strategy. It holds most of the well known large caps names that are also in our Rayno Large Cap Portfolio with weightings of 4-8%: Amgen (NASDAQ:AMGN), Biogen(NASDAQ:BIIB), Celgene (NASDAQ:CELG), Regeneron and Vertex (NASDAQ:VRTX). These stocks trade on revenues and earnings as well as clinical news.
- The ETF performance leader in 2015 is the XBI . The Top Ten holdings are even more shifted toward "story" stocks with minimal revenues that are in the news due to technological breakthroughs or positive clinical data. Among the holdings are : Alder BioPharmaceuticals, Inc. (NASDAQ:ALDR), bluebird bio , Esperion Therapeutics. Inc. (NASDAQ:ESPR) and Ultragenyx Pharmaceutical, Inc. (NASDAQ:RARE). The XBI is more equal weighted toward smaller stocks. Clearly the managers of this ETF, State Street Global Advisers (SPDRS) have a model or algorithms that can find "hot stocks'. particularly smaller caps.
We are in the sixth year of the secular biotech bull market. Most investors and traders now know about biotech stocks. ETFs deliver better performance than mutual funds with less risk than picking individual stocks. However we need to look at ETF performance in a correction. So here are some points to consider for the biotech sector moving forward in 2015:
- Many traders and investors are buying ETFs and total assets are increasing in all ETFs, so biotech stocks have greater support from more ETF buying.
- Are smaller less liquid stocks being driven up by ETF accumulation?
- Are we in the late stages of the bull market because more speculative stocks are outperforming?
- Large cap biotech stocks are now more sensitive to sales and earnings. Will mid and small caps continue to outperform due to M&A and positive clinical news?
- Large cap biopharmaceutical stocks are overbought so ETFs and funds may need to add mid and small caps.
Disclosure: The author is long FBIOX.