Behind XBI’s 2014 Tear

by on February 4, 2014 | ETFs Mentioned:

As we close out the first month of the year, 2014 is looking a lot less rosy than its predecessor. After last year brought on an insatiable bull run, it seems that markets were apprehensive to make a move higher. The last few sessions of January saw a harsh sell-off in a number of securities, with many starting the year in the red. There is one ETF, however, that has outdone many of its peers by a sizable margin, the SPDR S&P Biotech ETF (XBI). In fact, XBI is the best performing biotech ETF of the year, leaving many scratching their heads as to what lifted this ETF to such highs [for more ETF news and analysis subscribe to our free newsletter].

Underneath XBI

XBI tracks an equal weight index that invests in approximately 70 biotech companies at one time. The fund has over $1.2 billion in assets under management as well as a healthy daily volume just over 500,000 shares. While XBI is not the biggest or the most liquid biotech product out there, its YTD return of 15.4% is catching the eyes of many. Biotech ETFs in general have been outperforming the S&P 500 this year, helping nearly every fund in that sector. But one of XBI’s holdings has had a stellar year, propelling the fund above the rest.

The Power of One

The company is called Intercept Pharmaceuticals (ICPT) and its YTD return comes in at an earth-shattering 340%. After trials were stopped early, with a drug receiving statistical significance to proceed in treating Nonalcoholic steatohepatitis (NASH), a liver condition that typically requires a transplant to solve, the stock erupted. The drug could be the first of its kind on the market and a big step forward for the medical world.

XBI, an equal weight fund, held ICPT in approximately the same weighting as every other holding. As the stock soared, however, its weight jumped up to 5.78% in the ETF,  while most holdings account for approximately 1.5% of the fund. When XBI rebalances, those weights will be put back into check, but for now, the movement in ICPT has given it a dominant position in the fund, allowing XBI to beat out its peers. The following chart displays ICPT and XBI’s performance thus far in 2014:

According to XBI’s prospectus, rebalancing occurs on the third Friday of a quarter-ending month, meaning the fund is set to rebalance its holdings on March 21st. That leaves ICPT with approximately two months to dominate XBI. Investors need to keep a close watch on this stock and any developments in the liver drug, as it will have large implications for XBI’s near future.

Follow me on Twitter @JaredCummans.

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Disclosure: No positions at time of writing.