Is Your Biotech ETF A Leader Or Laggard?

by on March 8, 2010 | ETFs Mentioned:

As the array of ETF product offerings has expanded in recent years, the biotech space has seen significant activity. Currently, there are five biotech ETFs that have accumulated nearly $3.5 billion in aggregate assets. Each of these funds focuses on stocks in the biotechnology industry, and in many cases there is significant overlap between the top holdings. But as the relative performance of these funds so far this year has shown, the biotech ETFs available to U.S. investors are far from identical. Each of the biotech ETFs is up at least 6% so far in 2010, making this sector one of the best performers of the year. But the top-performing biotech ETF is up nearly 25% on the year, a significant return gap between funds that seem, at least on the surface, to be relatively comparable.

The significant performance gaps between these funds can be traced to the allocations made to a handful of biotech companies that have seen shares surge this year. Weightings given to some of the year’s top-performing stocks are all over the board for the various biotech ETFs; the companies highlighted below are among the top components of some funds and are excluded altogether from others.

Biotech ETFs
Ticker ETF YTD %
FBT First Trust Biotech ETF 24.4%
PBE PowerShares Dynamic Biotech & Genome 14.0%
XBI SPDR S&P Biotech ETF 10.1%
IBB iShares NASDAQ Biotechnology 8.9%
BBH Biotech HOLDRS 6.4%
  • Sequenom, Inc. (SQNM): Shares of this genetics analysis and testing firm have surged this year on analyst upgrades. Sequenom shares plunged last year after mishandling of data surrounding a non-invasive diagnostic test for Down Syndrome, but have reclaimed much of their lost ground in 2010.
  • Millipore (MIL): This biotech equipment maker has been the subject of speculation in recent weeks. Following reports that Thermo Fisher Scientific had made a takeover bid, it emerged over the weekend that Germany’s Merck KGaA had agreed to buy the company for just over $6 billion. Shares of MIL have gained nearly 50% so far this year.
  • InterMune (ITMN): After trading in a relatively tight range for most of the year, ITMN surged nearly 60% last week after the drug developer said it will meet with a FDA panel to discuss Pirfenidone, a drug designed to treat a rare chronic lung disease.

A quick look at the weightings given to each of these companies by the four major biotech ETFs sheds some light on the big gaps in year-to-date performance. These stocks are the four largest components of FBT, accounting for nearly 30% of assets. The biotech ETFs from PowerShares, State Street, and iShares give significantly less weight to these stocks; they account for only about 9% of PBE, 5% of XBI, and less than 2% of IBB.

Surging Biotech Stocks
Company YTD Gain FBT Weight PBE Weight XBI Weight IBB Weight BBH Weight
Sequenom 98% 8.0% 0.0% 0.0% 0.3% 0.0%
OSI Pharmaceuticals 84% 6.9% 3.9% 5.4% 1.5% 0.0%
Millipore 45% 6.1% 5.2% 0.0% 0.0% 0.0%
InterMune 45% 6.7% 0.0% 0.0% 0.0% 0.0%

The moral of the story? Funds may look similar on the surface, but the composition and nature of the underlying index can have a major impact on bottom line returns (see our index database for a unique way to screen ETFs by their related benchmark).

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Disclosure: No positions at time of writing.