Biotech ETFs Lead Q3 Rally: XBI Breaks Out

Biotech ETFs Are Having A Strong Quarter and Offer Good Investment Options

On July 20 we did a review of active funds vs biotech ETFs in the biotechnology/life science sector just after the BREXIT lows. At that time biotech ETFs and broadly diversified funds beat the “pure play” biotechnology funds such as Fidelity Select Biotechnology Portfolio (FBIOX). The biotech sector is doing much better since BREXIT in late June despite a sell-off in late August. We are still trying to escape a bear market mentality because of the Q1 correction and concerns about drug prices. Many ETFs are still down YTD while the S&P and NASDAQ are up over 6%.

  • The XBI has broken out above recent tops and is at early January highs before the crushing Q1 sell-off. Small caps are strong because of M&A. Down only 2.16% YTD but up 29% over three months saying we are out of the bear market in biotech.
  • Only a few large and mid cap biopharmaceutical stocks are at all time highs:Medivation was acquired for over $13B; Seattle Genetics (SGEN) is up 25% YTD.
  • The XLV Healthcare SPDR ETF is up 1.82% YTD after being hit this summer with the drug pricing issue.
  • The IBB is still down 11.4% YTD but now just above August highs at $299.
  • The broadly diversified T.Rowe Price Health Sciences Fund (PRHSX) is still down 5% YTD.
  • The Black Rock Health Sciences Opportunity Fund (SHSAX) is up 0.72% YTD.The Fund also has a broad focus in large cap drugs, biotech  and medtech.
  • The Fidelity Select Biotechnology Portfolio (FBIOX) is still the laggard down about 16% YTD. The fund is actively managed and holds the well known large cap biopharmaceutical names totaling 39% of portfolio. The FBIOX is coming back fast up 17% over the past 3 months tracking the IBB.

Here is our detailed view of ETFs compared to Life Science Funds in May 2014. At that time FBT was a leader but they have changed their strategy adding stocks like ILMN MDVN NKTR. Also at that time large cap biopharma companies were just beginning their huge moves into the 2015 “biobubble”. Interestingly the XBI was a laggard at that time.

Our conclusion has not changed since our previous reviews. An equity position in the life science industry can be achieved by utilizing one ETF, such as the IBB (or the FBIOX as it is catching up) and one diversified fund such as the SHSAX. The XBI should be added to the portfolio for a more aggressive “beta” and small cap weighting. The XLV offers more safety with larger cap drug stocks and is the best performing ETF in the sector up 1.82% YTD.

  1. The SPDR S&P XBI is breaking out from other funds and ETFs since the BREXIT bottom. Their approach is equal weighted holdings of about 2.5% with great momentum picks such as BLUE IONS SRPT and TSRO with frequent re-balancing.
  2. The First Trust Arca Biotech FBI is tracking the FBIOX performance but has diversified their holdings with diagnostics, services and tools stocks such as CPHD ILMN Q and QGEN.
  3. A safer bet for healthcare and biotechnology is the Healthcare Select SPDR XLV which primarily hold large cap biotechs and drugs with diversified healthcare stocks: AGN JNJ MDT.
  4. The FBIOX and IBB are comparable in performance lately with large cap holdings: AMGN  BIIB CELG GILD  REGN etc.
  5. The third quarter has been good for most funds and ETFs as you can see from the chart below. Last summer was a disaster with the crash of the “biobubble”. We are still more than 20% off July 2015 highs.

Chart forFidelity Select Biotechnology Portfolio (FBIOX)

, , , ,

No comments yet.

Leave a Reply