Lately, investors have begun to move away from sectors which offered higher dividends with lower risk towards risk prone sectors. In fact, some low risk investors who were playing a safe game in the bond markets have also started to give up on fixed income. This essentially signifies a move from sectors such as utilities and real estate to the likes of consumer discretionary, financials and biotechnology stocks.
The Healthcare sector, and biotechnology in particular, has been in the limelight in 2013. During the first half of this year, biotechnology funds have posted an impressive performance with the momentum expected to sustain the segment for the rest of the year. For a while there was a shallow pullback in both August and early October, but the sector seems to be back on track once more (Read: Top ETFs of the First Half of the Year).
In fact, biotech as a sector has shown high growth and high beta outperforming the broader markets. With ever-increasing healthcare spending and an insatiable demand for new drugs, the biotechnology sector looks poised for good growth going forward.
Furthermore, the U.S. biotech sector represents an attractive investment opportunity thanks to increased M&A activity. This helped the sector to be one of the top performers in 2012 and the trend continues this year.
“There has been a lull in M&A over the past year, but everything picked up over the summer with the recently agreed upon deal between Amgen and Onyx,” said Steve Silver, a biotech equity analyst at S&P IQ (Read: Biotechnology ETF Investing 101).
The Risks Involved
Though investing in this sector looks alluring, the risk here is huge. The securities in this sector are largely subject to regulatory approval from the Food and Drug Administration (FDA). If a company gets a drug approved by the FDA, its stock may gain pretty well but any regulatory failure may weigh heavily on the stock.
Ways to Benefit?
Investing in the biotechnology sector has proven to be a safe choice for investors who can endure volatility. In fact, with an aging population, the sector is poised to benefit. At this time investing in Biotech ETFs may be a smart move for investors.
The bullish fundamentals of the sector make it important to find a top ranked pick in this segment. In order to do this, investors can look at the Zacks ETF Rank and find the top biotech ETF (read: Play Surging Health Care with These Small Cap ETFs).
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, and style box or asset class (Read: Zacks ETF Rank Guide).
Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while these also receive one of the three risk ratings, namely, Low, Medium or High.
The aim of our models is to select the best ETF within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the Zacks ETF Center).
For investors seeking to apply this methodology to their portfolio in the Biotechnology sector, we have taken a closer look at the top ranked BBH. This ETF, with a Zacks ETF Rank of 1 or ‘Strong Buy’ (see the full list of top ranked ETFs), is detailed below.
BBH in Focus
Launched in December 2011, Market Vectors Biotech ETF (BBH) is a passively managed fund designed to track the performance of the Market Vectors U.S. Listed Biotech 25 Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund's benchmark index.
The index includes small and medium-capitalization companies and foreign companies that are listed on a U.S. exchange. Since inception the product has amassed $436.6 million in assets.
With holdings of 26 stocks, the fund is highly concentrated in the top 10 holdings which account for about 65% of its total assets. In terms of market cap levels, large cap stocks take almost a 64% share in the fund while mid-caps take 32% and small-cap securities share the rest. Style-wise, BBH is tilted more towards growth stocks, while a thin share is taken by value stocks.
From an individual holdings point of view, the top three are Gilead Sciences Inc., Amgen Inc. and Celgene Corp. with as asset share of 11.40%, 10.28% and 7.31%, respectively.
In terms of industry exposure, almost 90% of assets are allocated to biotechnology while the rest are taken up by pharmaceuticals (read: 3 Impressive Biotech ETFs Crushing the Market).
Given its average trade size, the product is not as popular as its counterparts as it trades in an average daily volume of 108,600 shares a day. The fund is easy on the pocketbook though, charging investors 35 bps in fees which is lower than the category average of 46bps (find all Health Care ETFs).
While BBH may not take the top spot in terms of AUM and trading size, in terms of performance it has beaten many of the titans in the category. BBH has given sturdy returns of about 44.6% on a year-to-date basis and over 50.6% in the trailing one-year period (read: Is the Biotech Sector Still a Market Leader?).
The Bottom Line
The biotechnology sector has been a strong performer so far in 2013 and analysts opine that the trend may continue for the rest of the year. This could prove to be especially true if this earnings season is a good one, as it would erase some of the shakiness investors have seen lately in the space, and suggest that another rally is at hand for BBH.
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