Despite recent pullbacks, exchange-traded funds in the biotech sector continue to outperform the market.

The S&P 500 has lost 32% year to date. While the major biotech ETFs have faced resistance, their performance has been nowhere close to that experienced by the broader market indices. So far this year the SPDR Biotech ETF ( XBI) and the iShares Nasdaq Biotechnology Fund ( IBB) are down only 9.7% and 11.6%, respectively. The Biotech HOLDRS Trust ( BBH) is actually up 0.3% year to date.

The relative strength of biotech ETFs has not gone unnoticed by money managers. "We had a buy signal in the spring on biotech," said Jim Porter, portfolio manager of the Aston/New Century Absolute Return ETF Fund ( ANENX). "It has substantially outperformed the Russell 3000."

Porter acknowledges that biotech is not in the clear just yet. "The sector has traded sideways since the middle of September," he said. "Venture capital is going to become more and more careful where it invests its money and is going to want larger ownership interests."

A Focused Approach

As of Aug. 31, the SPDR Biotech ETF, or XBI, was one of Porter's top 10 holdings. XBI has $543 million in total assets, which are spread across 22 holdings. Vertex Pharmaceuticals ( VRTX), OSI Pharmaceuticals ( OSIP) and ImClone Systems ( IMCL) are among the top names in the fund's portfolio.

The iShares Nasdaq Biotech Fund, or IBB, presents a fairly balanced attack with 147 holdings. In recent weeks, it has faced adversity similar to that of the market. "We recently turned negative on it," said Philip Yockey, president and chief investment officer of Tactical Analytics, an independent private research company. "Once it broke under $80, they crushed it like a grape. You have to be careful if it doesn't hold above $69."

If you liked this article you might like

Facebook's Chart Is Bullish

Trader's Daily Notebook: 3 ETFs With Healthy Setups

Trader's Daily Notebook: Keeping a Short Leash

Trader's Daily Notebook: Price Momentum Needs to Stick Around