Biotechnology ETFs are among the fasting growing companies in the health care world and are at the forefront of the sector rotation movement. As such, they look to benefit from the broad move away from boring low growth firms, and into higher growth, riskier sectors (read Biotechnology ETF Investing 101).
Biotech ETFs are also seeing truly impressive levels of momentum as of late, crushing not only the overall market, but broader health care sector funds as well. In fact, over the past six months, the average outperformance of the biotech ETF sector over the broader health care market has been about 800 basis points, suggesting that a tilt towards biotechs certainly hasn't been a bad idea.
Beyond momentum, the sector also looks well-positioned to benefit from the coming Obamacare changes. It managed to avoid the tax issue of the medical device space, while biotech's many new drugs look to be gobbled up by the larger base of insured persons across the U.S.
Mergers and acquisitions have also been a big deal for biotechnology firms, and with a return to M&A activity, this could act as a nice catalyst for the space as well. This is especially true given that the biotech companies generally have decent drug pipelines, and many are small and mid caps that make for ideal takeover targets anyway (see Two ETFs for the Muddle Through Economy).
Zacks Industry Rank
If that wasn't enough, investors should also note that the biotech-genome Zacks Industry Rank is quite favorable as well. At time of writing, this metric came in just outside the top third overall, while the average Zacks Rank for the industry has moved in the right direction over the past week too.
Top Biotech ETFs to Consider
Given this favorable position of the biotech industry, investors may want to consider some of the ETFs tracking this space for exposure. While there a number of quality choices in the space, we have highlighted some of our favorite top performing biotech ETFs below, any of which could make for excellent investments in today's growth-focused market:
This ETF tracks the Market Vectors US Listed Biotech 25 Index, a benchmark of 25 companies in the biotech sector. The fund charges a reasonable 35 basis point fee per year, and sees decent volume on assets of about $300 million (see Two Sector ETFs to Buy in 2013).
The ETF is heavily focused on large caps and growth stocks, as more than two-thirds of the portfolio falls in the large cap category, while about 80% is classified as growth. With this focus, it shouldn't be too surprising to note that the ETF doesn't really pay anything in yield, and that it isn't an income choice for investors.
In terms of holdings, large biotech firms take the top three spots and account for about 36% of assets, suggesting a relatively heavy level of concentration. Six other companies make up over 4% though, so there is a decent amount of diversification.
From a performance perspective, the ETF has been extremely solid, adding about 30% over the past six months. The fund is also up 55% from a one year look, thoroughly crushing similar funds and the broad market in the time frame.
This fund follows the NASDAQ Biotechnology Index, a benchmark of about 120 companies involved in biomedical research. The ETF charges 48 basis points a year in fees, and sees great volume on assets of just over $3 billion.
Growth stocks are once again a big part of this fund accounting for about 80% of the total. However, large caps aren't as dominant here, accounting for just over 50% of assets in IBB, leaving plenty for pint sized firms.
In terms of performance, this ETF has also been a solid performer, adding a whopping 30% over the past six months. The ETF has also done quite well in the trailing one year time frame, gaining an impressive 44.9% in that period.
For an equal weight approach to investing in biotechnology, investors have FBT a fund that tracks the Amex Biotechnology Index. Investors have to pay a bit more for this equal weight exposure though, as costs come in at 60 basis points a year, though volume and assets are still solid.
This approach also results in a bit of a value tilt, though growth stocks still make up a majority of assets in this ETF. Additionally, large caps make up just 40% of the fund, so there is definitely a tilt towards small companies that could be excellent takeover targets.
Beyond noting that each stock makes up roughly the same proportion in this ETF, investors should also note that just 20 stocks are in FBT's basket. So, on average, each company will only make up about 5% of the total, though this can fluctuate in between rebalancing dates.
This has been the worst of the three in terms of performance, but it has still beaten out broad benchmarks, adding about 27.5% in the past six months. Longer term the performance has also been shakier, adding 'just' 37%, though its focus on smaller securities could help it outperform if an M&A wave hits the biotech world (see Food ETFs in Focus on Deal Wave).
Biotechnology ETFs have had a pretty solid run over the past few months, outpacing broad markets, and the health care sector in general as well. Given the current trend in the market towards high growth sectors and away from dividends, these firms could certainly continue their recent run and move higher in the summer months.
This could be especially true given the decent industry rank for this segment, how well the sector is positioned for Obamacare implementation, and the many M&A opportunities in this corner of the investing world. So, if you are looking for high growth, high momentum play, any of the aforementioned biotech ETFs could definitely be a solid pick for the weeks and months ahead.
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Click here for your free subscription to Profit from the Pros.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.