Biotech ETFs: Fidelity Biotech Fund Outperforms IBB but XBI is Still the Leader

Fidelity Biotech Portfolio (FBIOX) Is Beginning to Show Benefits of Active Management

Biotech stocks have outperformed the market YTD despite a bit of a sell-off recently. During the bubblicious momentum days of 2015 when biotech was on a tear major biotech ETFs outperformed mutual funds. After two severe corrections in 2016 the Fidelity Select Biotechnology Fund (FBIOX) has begun to emerge as a good play for less volatile larger caps in the sector. The SPDR S&P Biotech ETF (XBI) remains the leader and favored play for traders despite the volatility. The XBI is a modified equally weighted index and includes may small and mid-cap stocks that are likely to move up in a sector rally.The stock holdings of the ETFs tend to be re-balanced often maybe as high as 60% depending on algorithms and hot stocks.We would expect active management to do better now that the biotech sector depends more on stock picking for example M&A plays.

Here is the performance YTD and over one year for these three biotech plays:

  • Fidelity (FBIOX) up 13%, up 17.79%.
  • iShares NASDAQ Biotechnology Index (IBB) up 9.02%, up 10.5%.
  • SPDR S&P Biotech (XBI) up 13.43%, up 33.96%.

For our portfolios we favor FBIOX for a core investment but the differential in performance compared to the IBB is small so either should work over time for large cap stocks. The advantage for ETFs is that trades can be executed during the trading day to catch volatile moves up or down. For example, we recommended the IBB at $250 after the BREXIT sell-off when it looked like a reversal was hit during the day in late June. It is interesting to note that over five years, especially during 2015, the ETFs outperformed and it is only recently that the FBIOX has closed the gap with the IBB.

We could also throw the First Trust Arca Biotech Index Fund (FBT) into the mix because it has more diversification of stocks but offers no performance advantage over the XBI. For example the FBT holds more weighting of small cap biopharma and diagnostic stocks such as Acadia (ACAD), Kite Pharma (KITE), Qiagen NV (QGEN) and Bio-Techne (TECH).Over one year the XBI outperformed the FBT by 19 percentage points and YTD by 4 percentage points.

The XBI holdings include Ariad Pharma (ARIA), Clovis Oncology (CLVS), Acadia Pharma (ACAD), Tesaro (TSRO) and Incyte (INCY). Some of these stocks are “deal” stocks with M&A rumors. Rather than analyzing the holdings of all ETFs and deciding which is best it is easier to pick two that encompass large caps and small/mid caps. The XBI broke out in Q3 2016.

Summary:

  1. The XBI outperforms in bullish or stable markets and is the preferred vehicle for trading and rebalancing biotech portfolios.
  2. The IBB is overweight well-known large cap biopharmaceutical stocks like Amgen (AMGN), Gilead Sciences (GILD), Celgene (CELG) and Regeneron (REGN). Because of these holdings the ETF is less volatile and comparable to the FBIOX.
  3. The Fidelity Biotech Fund (FBIOX) holds large cap stocks similar to the IBB but has outperformed over the past one year period possibly because of timely  picks like Incyte (INCY), Seattle Genetics (SGEN) and Tesaro (TSRO).

Disclosure: Long FBIOX, trading XBI.

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