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Biotech The Equal-Weight Way


Equal-weight ETFs are gradually getting more attention as more investors realize there advantages to this methodology and disadvantages to weighting an ETF’s holdings by market value. A prime example of an equal-weight ETF that has delivered for investors over the long-haul is the Guggenheim S&P 500 Equal Weight (RSP) , which has topped the S&P 500 for over a decade.

Equal-weight ETFs are found at the sector level as well, including in the ultra-hot biotech space. Biotech ETFs have been on a seemingly indomitable run this year as the iShares Nasdaq Biotechnology ETF (IBB) has surged 52%. The equal-weight SPDR S&P Biotech ETF (XBI) has been competitive with a gain of 48.5%. [Positive Prognosis for Biotech ETFs]

In the most literal sense of the word, IBB, the largest biotech ETF by assets with almost $4.1 billion, and XBI are competitors, but a deeper look shows this is not an apples-to-apples comparison. Actually, the funds do not share much in common beyond the biotech label and that is not a bad thing.

IBB has more than double the holdings (122) as XBI (60), but that does not mean the former is more diverse. IBB’s top-10 holdings represent 56.4% of the fund’s weight with Biogen (BIIB), Amgen (AMGN), Celegen (CELG) and Gilead Sciences (GILD) combining for nearly 32% of the ETF’s weight. Those are all large-cap stocks and that has clearly worked in IBB’s favor this year.

In XBI, none of the ETF’s holdings receive a weight above 2.55% and none of the aforementioned biotech giants are found in the fund’s top-10 holdings. In fact, Biomarin Pharmaceuticals (BMRN) is the only stock found on the top-10 rosters of both ETFs. Bottom line, IBB’s holdings had an average market cap of $25 billion at the end of the second quarter, and it is likely higher today. IBB’s weighted average market cap is $9 billion. [Three ETF Plays for the Outperforming Biotech Sector]

While the increased exposure to mid- and small-cap biotechs does mean XBI is more volatile than IBB, it does not diminish XBI’s utility. ETFs have become the most efficient manner to invest in the biotechnology industry. Since many of the companies are small- or mid-cap and are generally start-ups, ETFs can mitigate risk while allowing investors exposure to any upside. [Biotech ETFs Could Lead Into Year-End]

Although XBI “boasts just 58 holdings, it provides much more exposure (55%) to smaller- and micro-cap names. In contrast, large-cap holdings only make up about 14% of the fund’s investments,” according to Lou Basenese.

Remember that a primary disadvantage of cap-weighted ETFs is that they are often over-allocated to expensive stocks and under-allocated to inexpensive names. IBB has a P/E ratio of 35.27 and a price-to-book ratio over nine. XBI’s P/E is 27 with a price-to-book ratio of seven, according to State Street data.

SPDR S&P Bitoech ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.