The normally high-flying biotechnology sector is scuffling this year. The widely followed Nasdaq Biotechnology Index is down 3.7% year-to-date. Performances among biotech ETFs (exchange-traded funds) vary. Some are topping the Nasdaq Biotechnology Index while others are trailing.
If things do not change in a hurry, 2018 will mark the third consecutive year in which the Nasdaq Biotechnology Index lags the S&P 500 Health Care Index. Over that time, however, plenty of biotech ETFs have bested the broader healthcare sector. With fundamentals still strong for many biotech stocks, 2019 could bring a renaissance for these once beloved funds. There are encouraging factors to consider with biotech ETFs heading into 2019.
“Pharma development productivity was weak for a number of years, but there has been a very visible increase in clinical success for a number, but not all, of the large pharma companies as they have adjusted their approach to development,” reports PharmaExec.com. “Biotechs, as a group, continue to demonstrate their positive drug development capabilities.”
With 2019 right around the corner, here are some biotech ETFs to consider next year.
iShares Nasdaq Biotechnology ETF (IBB)
Expense ratio: 0.47% per yer, or $47 on a $10,000 investment.
The iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), the largest biotech ETF by assets, tracks the aforementioned Nasdaq Biotechnology Index. That is a cap-weighted benchmark, meaning IBB is heavily allocated to the largest biotechnology stocks.
IBB holds 191 stocks, but Amgen (NASDAQ:AMGN), Biogen (NASDAQ:BIIB), Gilead Sciences (NASDAQ:GILD) and Celgene (NASDAQ:CELG) combine for nearly a third of the fund’s weight. AMGN stock, IBB’s largest holding, recently received a bullish mention in Barron’s.
The financial news magazine highlighted AMGN stock’s new product pipeline, legal protections and robust cash position, which could be used to bolster buybacks and dividends.
ALPS Medical Breakthroughs ETF (SBIO)
Expense ratio: 0.50% per year, or $50 on a $10,000 investment.
The ALPS Medical Breakthroughs ETF (NYSEARCA:SBIO) has been highlighted in this space several times throughout 2018. And for much of this year, there was good reason for heaping praise upon SBIO. It was one of the best-performing biotech ETFs.
Like other biotech ETFs, SBIO got caught up in the October broader market swoon, and the fund is now down 2.8% YTD, but it’s still beating IBB. However, there are elements to SBIO’s weighting methodology that indicate the fund’s recent slide could be a buying opportunity for bold investors.
“Stocks included in the Underlying Index must also sustain an average daily trading volume in excess of $1 million for the 90-day period preceding an Underlying Index reconstitution. Constituents must be able to sustain the monthly rates at which they use shareholder capital (‘cash burn rates’) for at least 24 months,” according to ALPS.
Currently, SBIO’s components have, on average, enough cash to survive for over three years at current burn rates, more than double the comparable metric in the Nasdaq Biotechnology Index.
Invesco Dynamic Biotechnology & Genome ETF (PBE)
Expense ratio: 0.59% per year, or $59 on a $10,000 investment.
The Invesco Dynamic Biotechnology & Genome ETF (NYSEARCA:PBE) could be one of the best biotech ETFs in 2019 because the fund has been surprisingly sturdy this year. With just a few weeks left in 2018, PBE is sporting a year-to-date gain of 4.9%, good for one of the best showings in the biotech ETF space. PBE’s weighting methodology may have something to do with the fund’s relatively solid showing this year.
The fund’s underlying index “is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action, and value,” according to Invesco.
Home to 30 stocks, PBE holds many of the large-cap names featured in the aforementioned IBB, but this biotech ETF is not dominated by the largest biotechnology stocks. In fact, about 72% of PBE’s components are classified as mid- or small-cap stocks.
SPDR S&P Biotech ETF (XBI)
Expense ratio: 0.35% per year, or $35 on a $10,000 investment.
While there are benefits to embracing smaller biotech stocks, there are risks as well, some of which are highlighted by the struggles of the SPDR S&P Biotech ETF (NYSEARCA:XBI) this year. As an equally-weighted biotech ETF, XBI tilts more toward the sector’s mid- and small-cap names as highlighted by a weighted average market value of $10.85 billion for the fund’s 123 holdings.
The fourth quarter has been unkind to XBI as the fund sports a quarter-to-date loss of nearly 15% and resides 16.49% below its 200-day moving average. Some of the biotech ETF’s struggles could be related to politics as this is the second time the fund has struggled following the Democrats taking control of the House of Representatives.
With XBI residing more than 24% below its 52-week high, investors may want to wait for this biotech ETF to show some signs of life before attempting to catch what could be a falling knife.
First Trust NYSE Arca Biotechnology Index Fund (FBT)
Expense ratio: 0.56% per year, or $56 on a $10,000 investment.
Like the aforementioned PBE, the First Trust NYSE Arca Biotechnology Index Fund (NYSEARCA:FBT) could be a winning biotech ETF in 2019 because of its relative strength in 2018. FBT is up 5.6% year-to-date.
What makes FBT strong 2018 showing particularly notable is that, like XBI, the fund tilts toward smaller biotechnology stocks. The median market cap of FBT’s 30 holdings is $8.15 billion, according to issuer data.
Past performance is not a guarantee of future returns, but it is worth noting that of the biotech ETFs mentioned here to this point, FBT has easily been the best performer over the past 36 months.
iShares Evolved U.S. Innovative Healthcare ETF (IEIH)
Expense ratio: 0.18% per year, or $18 on a $10,000 investment.
The iShares Evolved U.S. Innovative Healthcare ETF (CBOE:IEIH) is not a pure play biotech ETF, nor is it a passively managed fund. IEIH does, however, feature credible biotechnology exposure with a unique approach to sector investing.
“The evolved sector approach uses text analysis, guided by machine learning statistical techniques, to identify words and phrases companies use to describe themselves in publicly available materials such as regulatory filings and earnings reports,” according to BlackRock. “Companies are grouped into sectors based on similarities in the language each uses when describing their businesses. In the example below, words in larger font sizes occurred with greater frequency among the listed companies and had greater relevance.”
While IEIH is not a dedicated biotech ETF, over half its 198 holdings can be classified as biotech stocks.
ARK Genomic Revolution Multi-Sector ETF (ARKG)
Expense ratio: 0.75% per year, or $75 on a $10,000 investment.
The ARK Genomic Revolution Multi-Sector ETF (NYSEARCA:ARKG) is an example of an ETF with a high fee that is worth its cost of admission. Up almost 19% year-to-date, ARKG is not just one of 2018’s best healthcare ETFs, it is one of the best non-leveraged ETFs of any stripe.
ARKG is not a pure play biotech ETF, but it does offer exposure to a wide range of disruptive healthcare themes.
“Companies within ARKG are focused on and are expected to substantially benefit from extending and enhancing the quality of human and other life by incorporating technological and scientific developments and advancements in genomics into their business,” according to the issuer.
ARKG components are engaged in stem cell research, targeted therapeutics, CRISPR and bioinformatics, among other fastest-growing areas of the healthcare universe.
Todd Shriber does not own any of the aforementioned securities.
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