As anyone in the biotech investing space can tell you, picking winners in this corner of the health care market can be extremely difficult. Failed trials, FDA concerns and pricing issues have hit a number of companies in this sector lately, turning winners into losers seemingly overnight.
But even with some extreme volatility, the biotech sector continues to be a strong performer in many respects. Several biotech indexes remain far ahead of the market on a year-to-date look, and not to mention from longer time frames too (see 3 Biotech ETF Winners from 2014's Best Performing Sector).
Yet the space can be very difficult to tap into for novices or for more experienced investors who haven’t done their homework. And even among the large caps, you often see divergent performances that you might not see in other corners of the market (such as consumers or financials for example), and we can see this with a quick comparison between Biogen (BIIB - Free Report) and Amgen (AMGN - Free Report) over just the last three months. In this time frame BIIB has outperformed by over 2,000 bps showing that security selection can be vital in this space, and even among the giants.
A Better Way?
Fortunately for investors who are unfamiliar with the nuances of the biotech world, there is a potentially easier way to gain access to the space but without all the single security risk. That approach is of course exchange-traded funds which allows investors to buy the whole trend in the biotech world allowing someone to avoid the pitfalls that can come with picking stocks in this difficult market.
And best of all, since biotech investing is so popular, there are a ton of great ETF choices in the market that have been crushing broad indexes on a YTD look. Below, we highlight three such funds which have not only trounced the S&P 500’s nearly flat performance so far in 2015, but are actually up over 20% this year making them top choices for investors seeking to gain exposure to the in-focus space:
SPDR S&P Biotech ETF (XBI - Free Report)
If you are looking for an equal weight approach to the biotechnology sector, XBI will likely become a favorite of yours. The fund spreads assets across nearly 90 companies in the biotechnology world and charges a relatively low 35 basis points a year in fees for the exposure.
As with most equal weight products, there is a significant tilt towards small and mid cap securities, as large caps account for just over 10% of assets. Total AUM for the fund is a robust $2.2 billion, while average volume comes in above half a million shares a day so this is an extremely liquid and easily traded fund (see biotech ETFs head-to-head: XBI vs. FBT).
Investors should also note that the small cap focus has paid off for XBI so far in 2015 as the ETF has added over 21% in the time frame. And with a Zacks ETF Rank #2 (Buy) there is plenty of reason to think that more gains could be ahead for this fund.
BioShares Biotechnology Clinical Trials Fund (BBC - Free Report)
One of the newest ETFs to tackle the biotech space has also been one of the best performers. The brand new BBC—which isn’t even six months old at time of writing—takes a novel approach to biotechnology investing that you really don’t get in any other product on the market right now.
The fund tracks an index which zeroes in on companies that have a primary product that is in Phase I, II, or III of FDA trials. The vast majority of the components in the product have a market cap between $2-$10 billion, but roughly 30% has a market cap below this threshold, giving a focus on small cap companies (SBIO vs. BBC: Two Innovative Biotech ETFs Head-to-Head).
The fund is a bit pricey with an 85 basis point fee per year, but it has managed to justify this cost with a very solid run to start the year. in fact, the fund has added just over 20% YTD so it is hard to believe this won’t be a very popular fund before long.
ProShares Ultra Nasdaq Biotechnology ETF (BIB - Free Report)
And if investors are feeling really bold about investing in the biotech industry, this ETF from ProShares could be worth a closer look. The fund uses a 2x leverage methodology on the Nasdaq Biotechnology Index (the same index that the unleveraged IBB tracks) in order to ratchet up exposure to the benchmark.
The fund definitely has a large cap focus, with about 60% of the portfolio going to the cap level, though a nearly 40% allocation to mid caps and lower is noting to scoff at either. Top holdings right now include the usual suspects of Biogen, Celgene, and Gilead, as all these make up more than 7% of assets each (see all the Leveraged Equity ETFs here).
BIB has gained close to 28% so far in 2015, while its unleveraged counterpart has added roughly 13.7%. It will be hard to beat BIB for bullish investors in the biotech market, but just remember that the volatility here will likely be pretty high and that you always must be careful with leverage.
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