After Recent Surge, Are Biotech ETFs Back on Track?

Zacks

The healthcare industry, especially its biotechnology corner, gave a stellar performance last year with the S&P biotechnology select industry index surging about 70%. The space saw a strong start to 2014 only to slump in the early phase of the second quarter on valuation concerns (read: A Comprehensive Guide to Biotech ETFs).

Having witnessed a rough stretch for about two months, the space started to gather steam from June. Of late, the sector has emerged as a strong performer with ETFs having returned in the range of 5% to 9% over the past one month.

Strong earnings were presumably the sector’s driving force. The Medical sector saw 15.7% earnings growth on 12.3% increase in revenues.  Most of the notable companies including Gilead Sciences (GILD), Celgene (CELG), Biogen (BIIB), Alexion Pharmaceuticals (ALXN) and Amgen (AMGN) either beat or at least met earnings expectations in Q2 (read: Biotech Earnings Put These ETFs in Focus).

If this was not enough, the outlook of the sector appears quite promising. The sector has obtained a high grade from various analysts. Within the Zacks Industry classification, the rank of the concerned MED-BIOMED/GENE industry is currently #77, 13 positions up from the past week (as of August 22, 2014). The rank is in the mid 1/3 of all 250 plus industries ranked, highlighting the group’s near-term relatively favorable outlook (read: About Zacks Industry Rank). 

With ever-increasing healthcare spending and unappeasable demand for new drugs, the biotechnology sector looks poised for good growth. Furthermore, the U.S. biotech sector represents an attractive investment opportunity thanks to increased M&A and IPO activities.

Rising activities in turn translated into growing investor enthusiasm for these stocks and the concerned ETFs. To add to these, the Affordable Care Act, also known as ‘Obamacare’, spending boom in healthcare in emerging markets and an aging population will pull the sector going forward.

Amid such a situation, investors seeking to tap the latest bullish trend in biotech stocks though a basket approach should look at these ETFs (read: How Will Biotechnology ETFs Finish Out the Year?):

First Trust Amex Biotechnology Index Fund (FBT)

For an equal weight and a smart-beta approach to investing in biotechnology, investors have FBT – a fund that tracks the Amex Biotechnology Index. Investors have to pay a bit more for this unique exposure as costs come in at 60 basis points a year, though volume and assets are still solid at 120,000 shares a day and $1.4 billion, respectively.

The portfolio has a bit of a value tilt which is good news given the constant valuation worries attached to the biotech space, though growth stocks still make up the majority of assets in this ETF.
 
Each company of the 20-stock portfolio makes up about 5% of the total. The fund has added about 26.5% so far this year (as of August 22, 2014). Over the last two weeks, the fund has returned about 6%. The fund has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

Dynamic Biotech &Genome ETF (PBE)

This fund provides exposure to 29 firms by tracking the Dynamic Biotech & Genome Intellidex Index. The fund trades in a lighter volume and has amassed about $387 million in assets. The fund does not have company-specific concentration risks as no firm accounts for more than 6% of the total.

Growth stocks take the centre stage in the portfolio with 72% of assets while large caps account for just 31% share. Expense ratio comes in at 0.63%. PBE has advanced about 24% to date while it has added 4% in the last two weeks. PBE has a Zacks ETF Rank #2 with a Medium risk outlook.

 iShares Nasdaq Biotechnology ETF (IBB)

This fund follows the NASDAQ Biotechnology Index, a benchmark of about 120 companies involved in biomedical research. This is the biggest fund in the biotech space having amassed about $5 billion in assets. The ETF charges 48 basis points a year in fees, and sees great volume on assets of over $1 billion.

Growth stocks are a big part of this fund, accounting for about 80% of the total with large caps playing a dominant role, making up just over 60% of assets. The fund has concentration risk with Gilead (9.3%), Celgene (8.9%) and Amgen (8.4%) taking the top three positions.

Probably due to its tilt toward growth stocks, the ETF shed more in this year’s momentum meltdown. The fund has gained about 17.5% from a year-to-date look. Over the last two weeks, the fund has added about 5.9%.  IBB has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Market Vectors Biotech ETF (BBH)

This ETF tracks the Market Vectors US Listed Biotech 25 Index, a benchmark of 25 companies in the biotech sector. The fund charges a reasonable 35 basis point fee per year, and sees a paltry volume on assets of about $516 million.

The ETF is heavily focused on large caps and growth stocks, as more than two-thirds of the portfolio falls in the large cap category, while about 80% is classified as growth. In terms of holdings, Gilead Sciences, Amgen, and Celgene take the top three spots and account for about 36% of assets, suggesting a relatively heavy level of concentration.

BBH has returned 16% on a year-to-date basis and 5.9% in the last two-week period. BBH has a Zacks ETF Rank #3 with a Medium risk outlook.

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