While the markets continue to do quite well, many investors have seen some sector rotation starting to take place. The move as of late has been out of lower risk, high dividend, sectors like utilities and real estate investment trusts, and into higher risk, growth sectors like financials, consumer discretionary firms, and health care.
This rotation is pretty evident when investors consider a six month chart of some of the major sector ETFs, and the dislocation between the higher risk and lower risk ones.
Pretty much starting in early May, sectors like financials (XLF) and health care (XLV - ETF report) took a leadership role, and left ones like utilities (XLU) and consumer staples (XLP) in the dust.
Given this reversal, it may be worthwhile for investors to go with the hot hand and stay in growth sectors. While a broad play could be an interesting way to go, investors may want to delve a bit deeper, and go with a surging segment of the health care world instead; biotechnology.
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:
Market Vectors Biotech ETF (BBH - ETF report)
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, Gilead Sciences (GILD - Analyst Report) , Amgen (AMGN - Analyst Report) , and Biogen (BIIB - Analyst Report) 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.
iShares Nasdaq Biotechnology ETF (IBB - ETF report)
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.
This fund’s holdings profile is similar to BBH, as GILD, AMGN, and BIIB all find their way into the top five. However, the top holding here is Regeneron (REGN), while Celgene (CELG) also finds its way into the fourth position at roughly 6.7% of assets (see Forget Big Pharma It Is Time for a Biotech ETF).
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.
First Trust Amex Biotechnology Index Fund (FBT - ETF report)
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.
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