Fidelity Biotech Portfolio (FBIOX) Is Beginning to Show Benefits of Active Management
Biotech ETFs have outperformed the S&P last year despite recent weakness but the IBB is barely keeping pace recently. During the bubblicious momentum days of 2015 when biotech was on a tear major biotech ETFs outperformed mutual funds and all were comparable. After two severe corrections in 2016 and early 2017 the Fidelity Select Biotechnology Fund (MUTF:FBIOX) up 28% over one year vs 19% for the IBB.
The SPDR S&P Biotech ETF (XBI) remains the leader up 40% over 12 months and a favored play for traders despite the volatility. The XBI is a modified equally weighted index and includes many well known mid-cap stocks with momentum that are likely to move up in a sector rally.The stock holdings of the XBI tends to be re-balanced often maybe as high as 60% depending on algorithms and news. We would expect active management to do better now that the biotech sector depends more on stock picking for example M&A plays.
Here is the performance over a 12 month period these four biotech ETFs compare to FBIOX:
- Fidelity (FBIOX) up 31%.
- iShares NASDAQ Biotechnology Index (IBB) up 19%.
- SPDR S&P Biotech (NYSEARCA:XBI) up 40%.
- First Trust NYSE Arca Biotech Index (FBT) up 34%.
For our portfolios we have favored FBIOX and XBI for a core investment providing a balance of large and small cap stocks. The advantage for ETFs is that trades can be executed during the trading day to catch volatile moves up or down. For example, we recommended the IBB at $250 after the BREXIT sell-off when it looked like a reversal was hit during the day in late June. It is interesting to note that over five years, especially during 2015, the ETFs outperformed and it is only recently that the FBIOX up 19.9% annualized return over 5 years has closed the gap with the IBB.
We could add the First Trust Arca Biotech Index Fund (FBT) into the mix because it has more diversification of stocks but offers little performance advantage over the XBI. For example the FBT holds more weighting of mid-cap biopharma and diagnostic stocks such as Illumina (ILMN),Bio-Techne (TECH) with Nektar (NKTR), Juno(JUNO and Neurocrine (NBIX). Over one year the XBI outperformed the FBT by 7 percentage points and the IBB by 21 % points. The performance gap widened in Q4 2017
The FBIOX holdings are as expected, 40% in large and mid caps that would benefit in any rally. Top five are : AMGN CELG REGN ALXN BIIB. With total assets of $8.7B the Fido Fund is large enough to affect performance of positions.
The XBI Top Ten holdings are <20% in large caps and include ALNY UTHR ARRY EXAS BLUE JUNO SRPT NBIX EXEL FOLD IMMU . The XBI holdings are quite variable probably helped by algos. Rather than analyzing the holdings of all ETFs and deciding which allocation is best it is easier to pick two that encompass large caps FBIOX or IBB and small/mid caps with equal weighting like the XBI. The XBI broke out in Q3 2016 and again in June 2017.
- The XBI, net assets $3.97B, outperforms in bullish or stable markets and is the preferred vehicle for trading and rebalancing biotech portfolios.
- The IBB, net assets of $9.8B, is overweight well-known large cap biopharmaceutical stocks like Amgen (AMGN), Gilead Sciences (GILD), Celgene (CELG) and Regeneron (REGN). Because of these holdings the ETF is less volatile but comparable to the FBIOX.
- The Fidelity Biotech Fund (FBIOX) holds large cap stocks similar to the IBB but has outperformed over the past 12 months possibly because of timely picks like Alnylam (ALNY, Incyte (INCY), and Abbvie (ABBV).
- Stock picking can be improved by looking at ETF portfolios for new holdings.
Disclosure: Long FBIOX, trading XBI.
Disclosure: I am/we are long FBIOX.
Additional disclosure: Long ABBV CELG