Biotech ETFs Lose Some Shine

For the bulk of 2013, biotech exchange traded funds have been among the best at the industry level. Some of the bloom has come of that rose in recent weeks, but there may still be some opportunity left in these ETFs for investors willing to buy the pseudo dip.

“Biotechnology investing, in our view, carries potential for above-average performance, as evidenced by the strong performance discussed above. However, this growth potential comes with a higher inherent risk profile, due to the potential for clinical failure, changes in a drug’s competitive dynamics, and regulatory scrutiny on safety, among other factors,” according to a research note by S&P Capital IQ.

To be sure, biotech ETFs are far more volatile than their traditional health care counterparts. Over the past 12 months, the iShares Nasdaq Biotechnology ETF (IBB) , the largest biotech by assets, has displayed volatility of 20.5%, 830 basis points higher than what is found on the Health Care Select Sector SPDR (XLV) . [Playing Defense Isn't Cheap]

“S&P Capital IQ has an overall Marketweight ranking on IBB, which contains NASDAQ-listed companiesclassified as either biotechnology (79.1% as of September 30, 2013), pharmaceutical companies (15%), or life sciences & services (5.6%). It has a Marketweight score in Performance Analytics, but a positive S&P Capital IQ STARS ranking. The fund’s top 10 holdings are all covered by S&P Capital IQ Equity Research, including eight in the biotechnology industry, plus one each in pharmaceuticals and life sciences,” according to the note.

S&P Capital IQ has five-star ratings on Gilead Sciences (GILD) and Celgene (CELG), two stocks that combine for nearly 17% of the ETF’s weight.

Still, IBB, along with other biotech ETFs, has struggled in recent weeks. Over the past month, the fund is down almost 5% and lost 3.3% in October alone. The bullish view of the matter is that IBB is still higher by 40.2% this year. [Biotech ETFs Stumble in October]

S&P Capital IQ also mentioned the SPDR S&P Biotech ETF (XBI) in its note, although the research firm does not have a rating on that ETF.

“Of note, XBI’s top-10 holdings accounted for only 22.85% of total assets. Therefore, the robust 186% year-to-date return of these holdings contributed less to the fund’s 12-month total return of 40.7%. Overall, the fund’s constituents were 22% mega/large cap and 78% small/mid cap, as of September 30, 2013. XBI’s turnover is 61%, and its weighted average market cap is $9.3 billion, one third that of IBB,” said S&P Capital IQ.

XBI has dipped nearly 11% in the past month and is up 25.8% this year.

SPDR S&P Biotech ETF

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.