Biotech ETFs: Appraising The Pipelines

June 17, 2020

  • Biotechnology has been a standout performer in 2020 as investors have focused on potential vaccines and treatments of COVID-19 rather than drug pricing. The subindustry, typically thought of as high risk/high reward, outshined the broader health care sector during this year’s market volatility.
  • Although biotech ETFs as a group have performed well, investors have favored the iShares Nasdaq Biotechnology ETF (IBB) and the First Trust NYSE ARCA Biotechnology Index Fund (FBT) over the cheaper SPDR S&P Biotech ETF (XBI) so far this year.
  • However, the much smaller VanEck Vectors Biotech ETF (BBH) has been a top gainer this year, aided by its unique exposure. CFRA believes investors need to understand what stocks are inside their ETFs and not just rely on fees or past performance.

Fundamental Context

Biotechnology has been the bright spot in an outperforming sector. Despite its growth image, the biotechnology subindustry has proven resilient during the recent market volatility, outperforming the broader health care sector year to date through June 12, as well as in the past 13 weeks as the broader stock market recovered.

The S&P 1500 Biotechnology Index has risen 5.7% year to date, ahead of the 4.4% loss for the health care sector, and declines in other large subindustry groups such as health care equipment and pharmaceuticals. In the last 13 weeks, biotech’s 11% gain was also ahead of those same subindustry groups and the broader sector, even as all rose in value with the broader market’s rally.

Biotechnology ETFs provide much-desired security-level diversification. While many biotechnology companies have grown over the years to be part of the S&P 500 Index, the subindustry still includes many under-the-radar companies that might break out, but might also suffer due to unforeseen circumstances and limited revenues.

Over the years, biotech funds have gathered net ETF inflows as they captured some of the rewards but, through diversification, limited the risks of owning just one biotech stock. Many firms, including iShares and State Street Global Advisors, offer biotech-themed ETFs.

iShares’ IBB is the largest of these subindustry-focused funds, with $8.5 billion in assets. In the three-month period ended June 11, which coincides with when COVID-19 emerged as a threat to America, the ETF pulled in approximately $660 million of new money, pushing its year-to-date inflows to approximately $500 million.

Investors also favored First Trust’s FBT, pushing the fund to the $2 billion asset mark with the help of $176 million of inflows since mid-March. In contrast, State Street Global Advisors’ $4.2 billion XBI experienced outflows of $40 million in the last three months and has approximately $150 million of redemptions this year.

 

 

Table 1: Demand For Biotech ETFs In 2020 Has Been Uneven

Ticker Assets ($B) YTD Flows ($M) Last Three Months Flows ($M)
IBB 8.5 498 661
XBI 4.2 -151 -40
FBT 2 119 176
BBH 0.4 48 61

Source: First Bridge Data, a CFRA company; as of June 11, 2020

 

 

Table 2: Performance Of Leading Biotech ETFs

Ticker Expense Ratio (%) YTD Total Return (%) Last Three Months Total Return (%)
IBB 0.47 5.8 30.8
XBI 0.35 4.1 39.8
FBT 0.55 6.3 31.8
BBH 0.35 10.1 30.8

Source: First Bridge Data, a CFRA company; as of June 11, 2020

 

 

Investors are not chasing the subindustry winners. The adage that investors chase top-performing funds, putting money into past winners, does not apply with these sector-focused ETFs so far in 2020. While investors have been redeeming XBI, the fund rose 40% in the past three months, much stronger than the still-impressive 31% achieved by IBB. Meanwhile, VanEck’s BBH, which has just under $450 million in assets, was up 10% year to date, ahead of FBT (up 6.3%) and IBB (up 5.8%).

The performance differences between these ETFs stems from much more than expense ratios of the products, as the gap between the most expensive (FBT) and the cheapest (BBH and XBI) is just 22 basis points.

The holdings inside similarly named biotech ETFs can be very different. The largest biotech ETF, IBB, holds more than 200 securities, but is relatively concentrated in a handful of large cap companies. The four largest positions—Amgen (AMGN), Gilead Sciences (GILD), Regeneron Pharmaceuticals (REGN) and Vertex Pharmaceuticals (VRTX)—combined are 30% of the assets. While BBH has a nearly similar 34% of assets concentration in its four largest holdings, two of the positions are different from IBB’s.

BBH has a 7.7% position in Moderna (MDRA), much higher than IBB’s 2.6% stake, and owns more of life sciences company Illumina (ILMN). BBH also owns just 26 positions, a fraction of the number inside IBB, leaving out many moderately sized companies. However, IBB’s inclusion of only Nasdaq listed securities results in the absence of S&P 500 constituent IQVIA Holdings (IQV), which trades on the New York Stock Exchange.

FBT and XBI focus more on smaller-sized companies due to equal-weighted approaches. XBI owns approximately 120 positions, fewer than IBB, but treats them generally equally. While the current portfolio has a 4% stake in MDRA and nearly 3% of assets in REGN, due to its recent rise in value and the delayed rebalancing of certain S&P indexes, XBI has more exposure to small- and midcap companies such as Amicus Therapeutics (FOLD) and Exelixis (EXEL) than IBB and BBH. Unlike its biotech ETF peers, XBI invests only in biotechnology companies that are members of the S&P Total Market Index; XBI does not own life sciences companies.

Meanwhile, FBT equally weights 30 companies—some of which are in the life sciences subindustry—that are primarily involved in the use of biological processes to develop products and services. Sarepta Therapeutics (SRPT) and BMRN were two of the largest positions. The fund is rebalanced quarterly.

Conclusion

Biotechnology has been a standout performer in 2020, as investors have focused on vaccines and treatments for COVID-19. Looking forward, CFRA thinks there will be differentiation within the subindustry as some stocks have stronger potential than others. Recently, investors have sought the diversification benefits ETFs provide but are not necessarily picking the best performers or the cheapest. Perhaps they, like CFRA, are focusing on what can be found inside, as there are notable differences between some of the largest biotech ETFs.  

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information and disclosures, please refer to CFRA's Legal Notice at https://www.cfraresearch.com/legal/.

Copyright © 2020 CFRA. All rights reserved. All trademarks mentioned herein belong to their respective owners.

 

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