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Top 5 Biotech ETFs

There are only a handful of effective ETFs focused exclusively on biotechnology. Nevertheless the sector contains companies that will probably produce more effective medical treatment and healthcare than all the insurance plans and HMOs combined. This is the next big thing for the human race as in the future immunization and cures for disease will allow people to live longer and healthier lives. As an anecdote a very famous and successful heart surgeon told me a few decades ago that his profession would no doubt be obsolete someday due to advances in biotechnology.

Biotechnology companies are valued more for their future promise than current earnings and sales. This has always been the case making PEs sometimes very high and confusing more uninformed investors. At the same time when there are clinical trial failures of new drugs or treatments the related company's shares may plunge significantly. Naturally successful results can lead to dramatic stock gains. One other little known trait is that when earnings from more conventional sectors struggle, investors often turn to the biotech sector seeking better performance away from earnings. It may seem an odd pattern, but it is something I've noticed over more than a few decades.

We feature a technical view of conditions from monthly chart views. Simplistically, we recommend longer-term investors stay on the right side of the 12 month simple moving average. When prices are above the moving average, stay long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues preferring instead to buy when prices are perceived as low and sell for other reasons when high; but, this is not our approach. Premium members to the ETF Digest receive added signals when markets become extended such as DeMark triggers to exit overbought/oversold conditions.

For traders and investors wishing to hedge, leveraged and inverse issues are available to utilize from ProShares and where available these are noted.

#5: Van Eck Biotech ETF (BBH)

 

BBH follows the Market Vectors US Listed Biotech 25 Index which is a rules-based index intended to track the overall performance of 25 of the largest U.S. listed and publicly traded biotech companies. The fund was "relaunched" in December 2011. It is the result of Van Eck taking over control of what previously was the Merrill Lynch HOLDRs which was a trust of securities from 2000.

As a trust the previous constituents could not be changed other than if one were assumed by another company or ceased to exist. As a consequence over time some constituents increased dramatically in size and weighting. Frankly BBH was Amgen and little else. The new index keeps much of the previous weightings as Van Eck from a business view most likely did not want to disrupt previous holders who were content with the way things were.

But now we move on and we'll see how the index changes over time. The expense ratio is .35%. AUM equal $105 million and average daily trading volume is 16K shares. As of mi-February 2012 the annual dividend yield is negligible and YTD return 18.95%. The one year return was 41.6% with the latter mostly due to an even heavier weighting in Amgen than currently.

Data as of First Quarter 2012

BBH Top Ten Holdings & Weightings

  1. Amgen Inc (AMGN): 18.07%
  2. Gilead Sciences Inc (GILD): 9.75%
  3. Celgene Corporation (CELG): 9.68%
  4. Biogen Idec Inc (BIIB): 8.39%
  5. Alexion Pharmaceuticals, Inc. (ALXN): 4.69%
  6. Vertex Pharmaceuticals (VRTX): 4.54%
  7. Life Technologies Corp (LIFE): 4.38%
  8. Pharmasset, Inc. (VRUS): 4.34%
  9. Regeneron Pharmaceuticals, Inc. (REGN): 3.96%
  10. Illumina, Inc. (ILMN): 3.83%

 

#4: PowerShares Dynamic Biotech & Genome ETF (PBE)

 

PBE follows the Dynamic Biotechnology & Genome Intellidex Index which is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investment timeliness and risk factors. The fund was launched in June 2005.

The expense ratio is .60%. AUM equal $149 million and average daily trading volume is 35K shares. As of mi-February 2012 the annual dividend yield is negligible and YTD return 13.36%. The one year return was 6.51%.

Data as of First Quarter 2012

PBE Top Ten Holdings

  1. Vertex Pharmaceuticals (VRTX): 5.58%
  2. Amgen Inc (AMGN): 5.26%
  3. Alexion Pharmaceuticals, Inc. (ALXN): 5.02%
  4. Life Technologies Corp (LIFE): 4.83%
  5. Sigma-Aldrich Corporation (SIAL): 4.75%
  6. Gilead Sciences Inc (GILD): 4.67%
  7. Waters Corporation (WAT): 4.57%
  8. Biogen Idec Inc (BIIB): 4.52%
  9. Neurocrine Biosciences, Inc. (NBIX): 3.46%
  10. Nektar Therapeutics, Inc. (NKTR): 3.22%

#3: First Trust Biotechnology ETF (FBT)

 

FBT follows the NYSE Arca Biotechnology Index which is an equal dollar weighted index designed to measure the performance of a cross section of companies in the biotechnology industry that are primarily involved in the use of biological processes to develop products or provide services. The fund was launched in June 2006.

The expense ratio is .60%. AUM equal $230 million and average daily trading volume is 146K shares. As of mi-February 2012 the annual dividend yield is negligible and YTD return 27.13%. The one year return was 7.23%.

Data as of First Quarter 2012

FBT Top Ten Holdings & Weightings

  1. United Therapeutics Corporation (UTHR): 6.28%
  2. Nektar Therapeutics, Inc. (NKTR): 6.04%
  3. Illumina, Inc. (ILMN): 6.03%
  4. Amgen Inc (AMGN): 5.92%
  5. Incyte Corp Ltd (INCY): 5.75%
  6. Alexion Pharmaceuticals, Inc. (ALXN): 5.65%
  7. Myriad Genetics, Inc. (MYGN): 5.63%
  8. Qiagen NV (QGEN): 5.57%
  9. Gilead Sciences Inc (GILD): 4.99%
  10. Celgene Corporation (CELG): 4.97%

 

#2: SPDR Biotechnology Select ETF (XBI)

 

XBI follows the S&P Biotechnology Select Industry Index which represents the biotechnology sub-industry portion of the S&P Total Markets Index. The S&P TMI tracks all the U.S. common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Small Cap exchanges.

The Biotech Index is an equal weighted market cap index. The fund was launched in January 2006. The expense ratio is .35%. AUM equal $547 million and average daily trading volume is 220K shares. As of mi-February 2012 the annual dividend yield is negligible and YTD return 20.05%. The one year return was 27.11%.

Data as of First Quarter

XBI Top Ten Holdings & Weightings

  1. Dendreon Corp (DNDN): 4.80%
  2. Regeneron Pharmaceuticals, Inc. (REGN): 4.79%
  3. Amylin Pharmaceuticals Inc (AMLN): 3.83%
  4. Cepheid (CPHD): 3.76%
  5. Human Genome Sciences Inc (HGSI): 3.67%
  6. Incyte Corp Ltd (INCY): 3.66%
  7. Ariad Pharmaceuticals (ARIA): 3.57%
  8. Vertex Pharmaceuticals (VRTX): 3.54%
  9. Gilead Sciences Inc (GILD): 3.52%
  10. Alexion Pharmaceuticals, Inc. (ALXN): 3.32%

 

 

#1: iShares NASDAQ Biotechnology ETF (IBB)

 

IBB which follows the NASDAQ Biotechnology Index which contains companies classified as either biotechnology core pharmaceuticals companies. The fund was launched in May 2001. The expense ratio is .48%. Assets under Management (AUM) equal $1.8 billion and average daily trading volume is 580K shares.

As of mid-February 2012 the annual dividend yield is negligible and YTD return 15.10%. The one year return was 27.76%.

ProShares has leveraged long and short ETFs for those wishing to speculate or hedge.

Data as of First Quarter 2012

IBB Top Ten Holdings & Weightings

  1. Amgen Inc (AMGN): 8.40%
  2. Alexion Pharmaceuticals, Inc. (ALXN): 6.66%
  3. Celgene Corporation (CELG): 6.32%
  4. Gilead Sciences Inc (GILD): 5.71%
  5. Regeneron Pharmaceuticals, Inc. (REGN): 5.43%
  6. Biogen Idec Inc (BIIB): 4.96%
  7. Teva Pharmaceutical Industries Ltd ADR (TEVA): 4.90%
  8. Perrigo Company (PRGO): 3.92%
  9. Vertex Pharmaceuticals (VRTX): 3.31%
  10. Mylan Inc (MYL): 2.78%

 

Biotech still remains the hope for the future of health care in our opinion. Exposure to them is important but their inherent volatility makes technical views also important.

We rank the top 10 ETF by our proprietary stars system as outlined below. However, given that we're sorting these by both short and intermediate issues we have split the rankings as we move from one classification to another.

 

 


Strong established linked index
Excellent consistent performance and index tracking
Low fee structure
Strong portfolio suitability
Excellent liquidity


Established linked index even if "enhanced"
Good performance or more volatile if "enhanced" index
Average to higher fee structure
Good portfolio suitability or more active management if "enhanced" index
Decent liquidity


Enhanced or seasoned index
Less consistent performance and more volatile
Fees higher than average
Portfolio suitability would need more active trading
Average to below average liquidity


Index is new
Issue is new and needs seasoning
Fees are high
Portfolio suitability also needs seasoning
Liquidity below average

It's also important to remember that ETF sponsors have their own competitive business interests when issuing products which may not necessarily align with your investment needs. New ETFs from highly regarded and substantial new providers are also being issued.

These may include Charles Schwab's ETFs and Scottrade's Focus Shares which both are issuing new ETFs with low expense ratios and commission free trading at their respective firms. These may also become popular as they become seasoned. 

For further information about portfolio structures using technical indicators like DeMark and other indicators, take a free 14-day trial at ETF Digest. Follow us on Twitter and Facebook as well and join our group conversations.

You may address any feedback to: feedback@etfdigest.com  

The ETF Digest is long IBB and XBI.

(Source for data is from ETF sponsors and various ETF data providers)

 

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Dave Fry is founder and publisher of ETF Digest, Dave's Daily blog and the best-selling book author of Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management, published by Wiley Finance in 2008. A detailed bio is here: Dave Fry.

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