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The Guide to Surging Biotech ETFs

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The healthcare industry, especially its biotechnology corner, gave an astounding performance last year with the S&P biotechnology select industry index returning about 70%. The performance has been exciting so far this year too, as evident from 15% return (as of January 31, 2014) and there is plenty of hope that this trend can continue through 2014.

Let’s dig a little deeper and take a look at the drivers of the performance (read: 3 Sector ETFs Surging to Start 2014):

The Affordable Care Act – A Major Driver: The sector remains a major beneficiary of the legislation’s The Affordable Care Act, often known as ‘Obamacare’. The act was aimed at bolstering the number of insured Americans, which in turn should boost demand for the Pharma and Medicare industry as a whole (read: Obamacare Will Be Amazing for These Stocks and ETFs).

Though the launch of the program had undergone a plethora of political as well as technological issues, finally things are looking to be under control. Now some consumers have bought new health insurance plans, or have signed up for the expanded Medicare program in order to obtain coverage.

The law also entails the U.S. companies to provide health insurance coverage to workers or face government penalties ($2,000 per employee). It does not, however, cover employees who work less than 30 hours per week on average. The law is applicable for employers with 50 or more full-time workers.  And with the implementation of these services from this year, the healthcare sector will surely get a massive boost.

Mergers & Acquisitions: The U.S. biotech sector, of late, has been gaining traction in terms of merger and acquisition (M&A) activity. Since 2009, the sector has seen at least 400 M&A deal each year. As per analysts, a pile of cash with sector biggies and still-modest R&D activity are prompting companies to join hands or take over a smaller entity. 

Boom in Healthcare in emerging Markets: The bio-tech industry has found new investment opportunities in the under-penetrated emerging markets. According to BB Biotech, growth markets like BRICs are expanding their healthcare operations, thereby shifting the sector’s expenditure from the private to the public sector. This transition is helping a major section of the population in accessing cost-intensive biotechnological treatments easily thus giving a boost the overall biotech industry (read: 3 Sector ETFs Crushing the Market in 2013).

Aging Population: As per BB Biotech, global population is aging faster than the overall rise in populace which in turn necessitates increased healthcare utilization and boosts the demand for biotechnology. In addition, companies are striving hard to come up with medicinal solutions to the critical diseases like Alzheimer’s, hepatitis C virus, osteoporosis, rheumatoid arthritis, psoriasis, multiple sclerosis, dyslipidemia, cystic fibrosis, cancer and orphan diseases.

Decent Zacks Industry Rank: To add to these, the sector has received high grade from various analysts. Within the Zacks Industry classification, the rank of the concerned MED-BIOMED/GENE industry is currently #105. The rank is in the mid 1/3 of all 260 plus industries ranked, highlighting the group’s near-term neutral outlook (read: About Zacks Industry Rank). 

How to Play?

Given the optimism and promising growth outlook, investors seeking to play the booming biotechnology might want to tap the space in the ETF form. For those investors, we have highlighted five ETFs that could be worth a look if the trend continues. All these have a Zacks ETF Rank #1 (Strong Buy). The gains out of these funds were double the return offered by the broader market fund SPDR S&P 500 (SPY) in the same time frame.

iShares Nasdaq Biotechnology ETF (IBB)

This fund provides exposure to 123 companies by tracking the Nasdaq Biotechnology Index. With AUM of more than $5.07 billion and average daily volume of about 850,000 shares a day, this is by far one of the largest and the most popular ETFs in the biotech space. The ETF charges a reasonable 48 bps in annual fees.

The product has concentration in the top 10 holdings which account for as much as about 55% of the total. Top three holdings Gilead, Amgen and Biogen make up for more than 20% of the fund (see more in the Zacks ETF Center).

In terms of performance, IBB returned as much as 65% in 2013. The fund carries a Zacks ETF Rank #1 (Strong Buy) with a ‘Medium’ risk outlook.

SPDR S&P Biotech ETF (XBI)

This fund follows the S&P Biotechnology Select Industry Index. The ETF has managed assets worth $$1.29 billion. In total, the product holds 71 securities, which are not at all concentrated on its top 10 holdings as it accounts for about one-fourth of the fund.
Intercept Pharmaceuticals takes up 6.27% share of the fund. Apart from that, no single company accounts for more than 2.43% of the basket. XBI charges investors 35 bps in fees (read: Intercept Pharma (ICPT) Pushes SPDR Biotech ETF Ahead of Rivals).

Investors have to pay 35 bps in fees and expenses which is much lower than the average expense ratio of about 45 basis points a year.  XBI gained an impressive 48.3% in 2013.
The product has a Zacks Rank of 1 or ‘Strong Buy’ rating with a ‘High’ risk outlook.

First Trust AMEX Biotechnology Index Fund (FBT)

This ETF tracks the NYSE Arca Biotechnology Index, giving investors exposure to 20 companies. It is an equal-dollar weighted index. The fund has amassed an AUM of $1.10 billion while charging a slightly higher fee of 60 bps per year from investors.

This product calls for high concentration risk with half of the total occupying the top-10 share. The fund added 50.6% in 2013. The product has a Zacks ETF Rank of 1with a ‘High’ risk outlook.

Market Vectors Biotech ETF (BBH)

This fund looks to track the Market Vectors US Listed Biotech 25 Index, holding 26 securities in the basket. With an AUM of $573.4 million and an average trading volume of nearly 90,000 shares a day, the fund offers moderate liquidity.

The fund is a cheaper option as it charges a 35 bps fee per year. The product is largely focused in its top 10 securities with around 70% of exposure suggesting high level of concentration risk.

Gilead takes the top spot with 14.7% coverage, closely followed by Amgen and Biogen at 10.87% and 8.67%, respectively. The ETF added a massive 65% in 2013. The fund carries a Zacks ETF Rank #1 with a ‘High’ risk outlook (read: Top Ranked Biotech ETF in Focus: BBH).

PowerShares Dynamic Biotechnology & Genome Portfolio (PBE)

This ETF follows the Dynamic Biotechnology & Genome Intellidex Index. The product has a somewhat low volume of about 90,000 shares a day, but a decent level of AUM at about $384 million invested in 30 stocks. Its top-10 holdings accounts for about 45% of the total. The fund charges 60 bps in fees and expenses from investors. It is a slightly pricey option.

The fund is tilted toward growth stocks. The product has added an impressive 62.0% in 2013. The fund has a Zacks ETF Rank #1 with a ‘Medium’ risk outlook.

Bottom Line

In a nutshell, the sector is poised to surge in the near term. The implementation of Obamacare was largely protested last year and led to a 16-day long government shutdown.  Investors should note that the Senate has reached a $1.1 trillion spending deal, though there was no treat for Obamacare in the bill, at least no resistance was also there in it.

However, investors should note that it is a high growth and high beta sector and thus the risk quotient should be considered before investing in the sector.
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