Biotech ETFs are defying predictions that small-cap stocks are likely to be under pressure.
Biotech ETFs have moved higher in the past week on a combination of several estimate-beating earnings reports and positive news about drugs now in development. Year-to-date, returns of biotech ETFs are outpacing the S&P 500 Index.
“I’m bullish on the overall sector,” said Jeff Loo, a health care equity analyst at S&P Capital IQ. “In general, the pipelines for biotech companies are pretty robust. There have been some pretty high-profile approvals over the past two years, and sales for these drugs have been nothing short of phenomenal.”
Loo, who primarily covers large-cap biotech names, stressed that views that small-cap stocks are likely to be under pressure this year should be parsed carefully, particularly regarding small-cap biotech names: “A lot of valuations are company- and drug-specific. It all depends on an individual biotech company’s pipeline.”
Investors who want exposure to both large-cap and small-cap biotech stocks in an ETF wrapper can find them in the following ETFs:
4. iShares Nasdaq Biotechnology ETF (IBB | A-37) AUM: $5.2 billion; YTD returns: 13 percent
IBB offers the most diverse, comprehensive coverage of the biotechnology space in the U.S. biotech segment. It tracks a straightforward, market-cap-weighted index consisting of 123 Nasdaq-listed biotech companies. Gilead and Biogen are both included in the IBB portfolio.
IBB is the largest and most popular fund in the segment, with $5.2 billion in assets under management. Besides IBB’s wide scope, it is efficient at tracking its underlying index, has the best liquidity in the segment and is reasonably priced—0.48 percent, or $48 for every $10,000 invested.
One downside to IBB is that because it tracks a Nasdaq-listed index, the fund can only hold companies traded on Nasdaq. While most U.S. biotech companies trade on Nasdaq, IBB misses out on current and future biotechnology companies traded on the NYSE. A number of other competing biotech ETFs are eligible to hold such Big Board-listed drug firms.
3. SPDR S&P Biotech ETF (XBI | A-43) AUM: $1 billion; YTD returns: 15 percent
XBI’s equal-weighting scheme tilts the fund toward small-caps, and some micro-caps too (combined 53 percent). It is currently the only fund with exposure to Puma Biotechnology.
XBI is the second-most-popular biotech ETF, having amassed more than $1 billion since its 2006 inception. It also has the lowest annual expense ratio in the segment, coming in at 0.35 percent, or $35 for every $10,000 invested.
Overall, XBI’s weighting structure and low cost makes the fund suitable for long-term investors wanting exposure to smaller companies in the biotechnology industry.