Biotech ETFs XBI and IBB - Easily Buy the Best Biotech Stocks
Buying individual biotech stocks can be risky. However, biotech ETFs can provide the diversification of a mutual fund and at the same time trade like individual stock shares. This article will guide you through the advantages of biotech ETF investing and show how you can easily buy the best biotech stocks through ETFs.
An ETF is a cluster of securities that commonly track a certain index and can be traded like a stock on an exchange. The index can be very broad like the S&P 500 Index or extremely narrow like the NASDAQ Biotechnology Index. Currently, there are close to 2,000 ETFs in the U.S. stock markets that are collectively worth about $3 trillion. Within the ETF industry there are many biotech ETFs to choose from. These ETFs are composed of the some best biotech stocks. Stocks like Gilead, Vertex and Regeneron have experienced great price appreciation as the companies have increase revenue and brought life changing therapies to patients. Purchasing these companies under the IBB stock symbol provides instant diversification. Similar to a biotech fund mutual, biotech ETFs allow an investor to easily buy a collection of stocks under one symbol. However there are differences between mutual funds and ETFs.
How Biotech ETFs Differ from Biotech Stock Mutual Funds?
While ETFs closely resemble indexed mutual funds, there are some stark differences. Biotechnology Mutual funds are created by fund companies that choose a set of biotech stocks and group them together to form various funds. For example the Fidelity Select Biotechnology Portfolio is a popular biotech mutaul fund started in 1985. The fund consists of individual biotech stocks like Amgen and Celgene. Biotech ETFs, on the other hand, are created by sponsors who file plans with the U.S. Securities and Exchange Commission (SEC). Once the plan is authorized, a set of shares from each participating company are placed in a trust and converted into ETF units by the sponsors.
Mutual funds have a net asset value (NAV) which is calculated at the end of trading each day. ETFs, on the other hand, do not have a NAV, and you can buy or sell them anytime. Their price, however, keeps changing throughout the day and is susceptible to market fluctuations. Biotech Mutual funds can be traded only at the end of the trading session at their NAV price.
Unlike actively managed mutual funds, ETFs do not have investment minimums and redemption fees. The expense ratio of an ETF is also lower than a mutual fund focusing on similar areas of the capital market.
Mutual fund managers publish a list of their holdings once every three months but they lack transparency at other times. When you own an ETF, you will be aware of the stocks in your portfolio. Many biotech investors enjoy having this type of control over their investments.
What are the Advantages of Biotechnology ETFs?
Biotech companies are different from other types of industries trading in the stock market. Most biopharmaceutical companies invest millions of dollars in research and development. If they succeed, they commercialize the new drug and earn revenue from it. However, a significant proportion of molecules undergoing research do not go the next level. These drugs provide little or no pay off to the parent company in spite of spending all that money on laboratory tests and clinical trials. Moreover, biotech companies and their management often have less control over the circumstances that lead to the success or the failure of a project. The U.S. Food and Drug Administration (FDA) regulations and the approval process determine the value of the product and the actual time frame for commercialization.
As a result, it is often difficult to predict the future of a biotech firm. The stock prices are extremely sensitive to the positive and negative announcements from the FDA and the company itself. Therefore, many investors prefer to buy ETF units that allow them to invest in several biotech firms at the same time. Biotech ETFs are relatively more stable because the negative news from one company may be neutralized by the successful completion of a clinical trial by another.
Which is the Best Boitech ETF?
Biotech ETFs have done well in recent times with Biotech ETFs showing among the best 5 and 10 year gains of any ETF.
- The First Trust NYSE Acra Biotechnology Index Fund (FTB) seeks to track the performance of the Arca Biotechnology Index. This ETF has done very well with an annulized rate of return of over 15% since inception. This ETF holds small cap biotech firms as well as larger companies. The index is made of 30 companies. The small number of companies along with the small size of some entities can result in more volatility and large price swings.
- PowerShares Dynamic Biotechnology and Genome Portfolio (PBE) is based on the Dynamic Biotech & Genome Intellidex. The Index is comprised of stocks of thirty US biotechnology and genome companies. This ETF is unique in that it provides more exposure to advances in gene therapy and genetic testing through companies like Genomic Health (GHDX).
- VanEck Vectors Biotech ETF (BBH) seeks to track the performance of the MVIS US Listed Biotech 25 Index. This is one of the most concentrated ETFS with only 25 companies usually represented and assets under $1 billion.
- iShares Nasdaq Biotechnology ETF (IBB) is the largest biotech ETF in the market. It is composed of over 100 stocks and has around $8 billion in assets.
- The SPDR S&P Biotech ETF (XBI) is the second largest biotech ETF with several billion dollars in assets and is composed of less than 100 stocks.
Together these five ETFs represent some of the top biotech stock investment options. Through these ETFs you can own shares in small innovative biotech firms like Ionis as well as more mature companies like Biogen. Investors are keeping a close watch on them as they may be the best indicators of success in the biotech and pharmaceutical sectors within the stock market.
Which is the Most Popular Biotech ETF?
Although investors have several options, the two most popular biotech ETFs in the market today, IBB and XBI, are more closely examined below.
iShares Nasdaq Biotechnology ETF: Stock Symbol IBB
IBB ETF has been created for investors seeking exposure in U.S. biotech and pharmaceutical companies. The holdings of this ETF are listed on the NASDAQ, and closely track the NASDAQ Biotechnology Index, Ticker XNBI. More than 75 percent of the market value of this fund comes from biotech companies, while pharmaceutical companies constitute the remaining value. With more than $8 billion dollars in assets, this is the largest biotech ETF on the Nasdaq. This ETF is weighted by market capitalization so the larger companies influence ETF performance more than the smaller companies. The top 10 holdings of IBB include:
- Regeneron Pharmaceuticals (REGN)
- Celgene corp (CELG)
- Amgen (AMGN)
- Gilead Sciences (GILD)
- Biogen Inc (BIIB)
- Vertex Pharmaceuticals (VRTX)
- Illumia (ILMN)
- Incyte (INCY)
- Mylan NV (MYL)
- Alexion Pharmaceuticals (ALXN)
These 10 companies comprise nearly 60% of the ETF's assets.
All the securities included in this Biotech ETF meet the eligibility criteria determined by The Nasdaq OMX Group, Inc., such as minimum market capitalization of $200 million and an average trading value of at least 100,000 shares. The ETF is reviewed once every six months to make sure all stocks are still meeting the eligibility criteria. As a result, only larger companies influence the performance of this fund. Small cap companies have a limited impact, and are often removed from the fund if they do not meet the criteria.
SPDR S&P Biotech ETF: Stock Symbol XBI
With several billion dollars in assets, XBI ETF is the second largest biotech ETF in the U.S. right now. It also seeks to provide exposure to U.S. biotech and pharmaceutical companies listed on the S & P Index. Top holdings of this fund include:
- Vertex Pharmaceuticals
- bluebird bio
- Regeneron Pharmaceuticals
- Ionis Pharmaceuticals
- Exact Sciences Corporation
- Alnylam Pharmaceuticals
- Puma Biotechnology
- Sarepta Therapeutics
This biotech index is a modified equal weight index and consists of about 100 companies ranging in market cap size from several hundred million dollars to nearly $100 billion. As a result, investors get exposure to small cap, medium cap and large cap companies in this fund.
XBI has been created based on the Global Industry Classification Standards (GICS). The eligibility criteria for stocks in this fund include a position within the 90th percentile of the float-adjusted market capitalization for biotechnology GICS. XBI only includes U.S. based companies. All companies on the fund should also have liquidity ratio of more than 60 percent. The SPDR S&P Funds seek to provide investment results that correspond to the total return performance of the industry-specific Index. They do not take fees and expenses into account. The SPDR S&P Biotech ETF is no different and tracks the performance on S&P Biotechnology Select Industry Index.
Are Stocks or ETFs the Best Biotech Investment?
Both XBI and IBB offer great investment opportunities to prospective investors in the biotech sector. They track different indices. The IBB focuses on large biotechnology and pharmaceutical companies while XBI provides equal weight to small cap biomedical companies. Therefore investors can get some exposure to small cap biotechs with the XBI ETF. In addition, there are many other ETFs which focus on biotechnology and pharmaceutical sectors. As stated earlier, they may be more stable and reliable compared to independent biotech stocks that fluctuate based on results of clinical trials and FDA Calendar updates.
However, the requirements for XBI and IBB biotech stock ETFs prevent investing in some of the most exciting micro cap biotech stocks. Furthermore for active investors looking to play the price swings seen in small cap biotech stocks, ETFs are not a good match for this investment style. Your comfort level and investing style will play a large part in whether you choose to invest in a biotech ETF. As with any stock market investment, consider all the options and risks before making the final investment.