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Inside the Wild Ride of Biotech ETFs

Eric Dutram

It has been an absolutely brutal month to be in the biotech ETF space. The segment has been hammered over the past 30 days as worries over high flying stocks have crushed securities in this industry.

Investors had hoped that Wednesday’s session, in which many biotech stocks and ETFs saw a decent rally, signaled the end of the pain for the space, but Thursday’s trading suggested that more losses might be ahead. In fact, Thursday saw truly horrendous performance figures for ETFs across the biotechnology industry as these once again led the market lower.

Biotechnology ETFs in Focus

Performances during the session for the biotech sector, in which the S&P 500 lost about 2.1%, saw a range of about a 5.5% loss, to as much as a 6.4% slump. Clearly, investors were selling off biotech in droves once more, continuing the longer term trend for the space (See Biotech ETF Investing 101).

However, investors should note that there were some differences among the funds that target this corner of the stock world. Easily the most popular biotech ETF, the iShares Nasdaq Biotechnology Index Fund (IBB), saw volume that was more than two times normal and slumped about 5.5% on the day (3 ETFs Tumbling on Biotech Sell-Off).

Meanwhile, BBH and FBT both lost in the neighborhood of 5.75% for the session, while XBI lost far more than the others, plunging by 6.4% on the day.

What Gives?

The differences in performance can largely be attributed to what the ETFs are focusing on in their portfolios. IBB has a big weight towards the pharmaceutical sector, giving the segment roughly 21% of its assets. This sector has done quite a bit better than biotech as of late, and the large cap focus of IBB hasn’t hurt matters either.

Meanwhile, BBH and FBT have a bit less in pharma, though still double digit weightings. Interestingly, FBT actually has a bit more in the segment, but since it has an equal weight focus for its product, it is already heavy in small and micro cap biotech stocks. It appears as if the pharma component has acted as a bit of a counterweight in this slump and allowed FBT to outperform BBH when it otherwise would have been trending lower thanks to its small cap focus.

Lastly, XBI, a State Street ETF that has an equal weight focus, is entirely focused on the biotechnology space. This coupled with the small and micro cap tilt that is inevitable with an equal weight ETF, has driven XBI far lower than its competitors during the slide (see Are Equal Weight ETFs Worth the Cost?).

This trend is also evident over the longer term, as XBI has plunged far lower in the slump than the other products in the biotechnology world. In fact, XBI is approaching a 20% loss for the past month, compared to a roughly 13.6%-15% slump for the rest of the segment.

These divergent performances should show investors that all ETFs in the space aren’t equal, and that changing market conditions can drastically impact performance for funds in very different ways. Additionally, a 'biotech' ETF-- and this can go for other sector funds too-- can hold other related stocks as well, so make sure to dig deep into a fund's holdings before you select the product that is right for you.

Bottom Line

Despite the slump, we currently have solid ranks for many of the biotech ETFs on the market, while the Zacks Industry Rank for the biotech sector has the space in the top 30%. So clearly the earnings estimate revisions are still heading in the right direction, even if stock prices aren’t (see all the top Ranked ETFs here).

This suggests that this is just some profit taking, and traders selling out of high flying names in both this sector, and in other momentum segments like the broader technology world, as opposed to actual concerns about the biotechnology market. So while more pain could continue in the near term for this beaten down sector, the long term future is still promising for biotech ETFs, even if it is hard to see that amidst the severe selling pressure right now.

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