Biotech Laggard

Published on Wednesday, 18 April 2012 22:28 Written by Todd Shriber

Whether one attributes it to good news on the FDA front or increased mergers and acquisitions speculation, the biotech space has been a solid performer this year. The same goes for the major ETFs that track the volatile sub-sector of the health care universe. One those solid performers among biotech ETFs is the SPDR S&P Biotech ETF (NYSE: XBI), which is up 12.6% year-to-date, making the fund a far more rewarding trade than the S&P 500.

Not many investors will complain about a return of almost 13% in less than four months, but when one drills down on XBI, things don’t look so rosy. On a year-to-date basis, XBI is trailing the larger iShares Nasdaq Biotechnology ETF (NYSE: IBB) by 1.5%. However, the First Trust NYSE ARCA Biotech Index Fund (NYSE: FBT) crushed both funds, as shares are up 21.5% year-to-date.

That’s the bad news on the upside. The bad news on the downside is predictably worse when it comes to XBI. In the past month as the broader market has correct a bit and investors have shunned riskier sectors, biotech stocks have retreated a bit. That has resulted in tolerable declines of 1.1% for FBT and 1.6% for IBB. On the other hand, XBI is down 4.7%, nearly triple the declines seen by rival IBB.

Home to 47 stocks, XBI does have some high points. With over $512.5 million in assets under management and average daily volume in excess of 233,000 shares, it’s easy to understand why the fund has thrived in the past six years since its debut and those statistics bode well for the ETF remaining on the market for years to come.

Just to be fair, it should be noted that over the past year XBI has outperformed FBT and over the past five years, the SPDR has returned a stellar 46.2%. Also to XBI’s credit, the fund does a good job of spreading its weight as no single stock receives an allocation of more than 4.4%. Along those lines, XBI is not heavily allocated to biotech’s big four – Amgen (NASDAQ: AMGN), Biogen (NASDAQ: BIIB), Celgene (NASDAQ: CELG) and Gilead (NASDAQ: GILD). Combined that quartet represents just 12% of XBI’s weight. By comparison, those four names account for roughly a quarter of IBB’s weight.

In other words, XBI is a tad more focused on higher beta biotech names such as Regeneron Pharmaceuticals (NASDAQ: REGN), Onyx Pharmaceuticals (NASDAQ: ONXX) and Alexion Pharmaceuticals (NASDAQ: ALXN). That means XBI is chock full of takeover targets, but it also means the fund is more vulnerable to broader market pullbacks than its rivals.