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ETF News And Commentary

Intercept Pharmaceuticals (ICPT - Snapshot Report) was a star performer in Thursday’s trading session, as the stock skyrocketed close to 300% on the day. This massive gain for this biotech firm was thanks to some very positive news regarding a trial for the company’s key liver disease drug.

A data monitoring board recommended than the company stop the trial of its drug, obeticholic acid, because patients were doing far better on the drug than those who just had the placebo. The drug looks to be used to fight a type of chronic liver disease (nonalcoholic steatohepatitis) which can result in massive complications for those afflicted, and it is actually a leading cause of liver transplants in the U.S. (see all the Health Care ETFs here)

Close to eight million people suffer from the advanced stages of the disease, while 22 million have the disease in some form, according to Janney Capital Markets analyst Jim Molloy. And, there are currently no approved drugs for the illness, so this new Intercept drug could really make a huge difference in this market.

Stock Impact

With the potential to dominate this massive market, it is easy to see why ICPT performed so well in Thursday’s trading session. The stock added more than $200/share on the day to finish above the $275/share mark, while its crushed its average volume figures, as more than 6.3 million shares moved hands compared to just 210,000 on average.

The news also had a modest impact on the biotech ETF market, though the results were not evenly spread across the space. In particular, the fund that focuses on an equal weight strategy, the SPDR S&P Biotech ETF (XBI - ETF report), was the biggest winner from the news.

This is because XBI allocates about 1.6% of its total to the small cap company, enough to put it just outside the top 20 in terms of holdings. However, not a single company makes up more than 2.8% of assets, so it is very well spread out among its components (read Obamacare Will Be Amazing for These Stocks & ETFs).

This small allocation, coupled with strength in other biotech names on the day, helped to propel XBI to a 7.5% return on the day. And this is especially impressive when you compare it to others in the space, which do not have the same weighting strategy.

Other Biotech ETFs

Consider the iShares Nasdaq Biotechnology Index Fund (IBB - ETF report), the First Trust AMEX Biotechnology Index Fund (FBT - ETF report), or the Market Vectors Biotech ETF (BBH - ETF report). All three of these added about 1.3% on the day, and thanks to XBI’s performance today, are all significantly lagging the SPDR product to start the year.

The reason for this is largely due to the fact the ICPT is only included in XBI’s portfolio, thanks to that fund’s focus on small and micro cap securities. In fact, just 10% of XBI’s portfolio goes to large caps, compared to nearly 30% in small caps and 40% in micro cap stocks.

Contrast this with some of the other names in the biotech ETF space, and you begin to see why XBI, thanks to its smaller cap focus, was the only one that even held ICPT. BBH has about 63% in large caps and 30% in mid caps, FBT has a 40% large cap weight and 30% in mid caps, while IBB puts 55% in large caps and 25% in mid caps (see Play Surging Health Care with These Small Cap ETFs).

With this focus on larger cap stocks, many ETFs missed out on Impact and their incredible performance during Thursday’s trading session. However, because XBI follows an equal weight benchmark and it has a strict focus on biotech firms, it had a modest allocation to the biotech all-star which was enough to send this ETF far higher than its peers.



Bottom Line

ICPT soared in Thursday trading, thanks to some great news for its top drug in development. The company almost saw a 300% gain for the day, so clearly many believe that this drug can be a blockbuster.

While it would have been nice to have bought in on this company, many investors may have hoped that they had some exposure to the firm via their biotech ETFs. Unfortunately, only XBI really had any holdings in the firm, thanks to its equal weight focus which gives more weight to small cap firms (read 3 Impressive Biotech ETFs Crushing the Market).

This should show investors that weighting methodology really matters, and that it can make a huge difference in terms of return, and especially so in the biotech market. So make sure to keep this in mind the next time you are selecting an ETF for exposure, as not all ETFs use the same strategies—or produce similar returns—even if they are targeting the same sector.

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