2014 YTD- ETFs Outperformed Managed Funds In Biotech

In the past managed life science funds outperformed ETFs but this has reversed in 2014. Fidelity’s flagship Select Biotechnology Portfolio (FBIOX) is up 10% YTD and 41.4% over one year, and 229.6% over 5 years.  The fund is concentrated in large cap and mid cap stocks; Gilead Sciences (GILD) represents 17% of all holdings with 7% holdings in Amgen (AMGN) and Biogen Idec (BIIB).  The fund took a big hit after the bubble peak in February but has recovered but still off 15% from 2014 highs.

Performance YTD shows all major ETFs outperforming Fidelity Select Biotech (FBIOX):

First Trust NYSE Arca Biotechnology Index Fund FBT  is up 19 % YTD,  41.5 % over 1 Year.

Power Shares Dynamic Biotech and Genome PBE is up 18% YTD,  51.3% over 1 Year.

SPDR S&P Biotech XBI is up 18.3% YTD,  47.8% over 1 Year

iShares NASDAQ Biotechnology Index IBB is up 13.2% YTD,   47.8% over 1 Year

Two other highly ranked health science mutual finds also underperformed: T.Rowe Price Health Science Fund (PRHSX) up 10.9 % YTD, up 30.7% over 1 year; and BlackRock Health Science Opportunities Portfolio (SHSAX) up 11% YTD, 20.6% over 1 year. These funds offer more diversified holdings of large cap healthcare stocks.

This trend is reflected in the broader market with more than 74% of actively managed funds of big U.S.companies lagging behind the S&P 500. With respect to biotech there could be several reasons why ETFs have outperformed the Fidelity Select Biotech Fund (FBIOX):

  • The collapse in biotech stocks after the January/ February run-up may have been too much of a challenge for larger mutual funds. ETFs may be more nimble.At the March 1 peak FBIOX was the leader up 26%.
  • Fidelity Select Biotech Assets have grown to $8.11B about 5x that of January 2013. It could be that heavy inflows beginning Q4 2013 made stock picking harder. FBT for example, has only $1.1B in assets.
  • ETFs may have algorithms or trading schemes that rebalance portfolios in favor of momentum stocks or high fliers.
  • Active traders and hedge funds can buy ETFs in volume during the day creating momentum.

Earlier this year we recommended FBT over FBIOX  but we still recommend a mix of the Fidelity Select Biotech fund with an ETF such as FBT or IBB. Keep in mind that longer term trends may favor active management especially in down markets. Here is an article I wrote in January 2013 comparing ETFs with Mutual Funds and the conclusion was similar i.e. ETFs can produce comparable or better results than managed funds in the life science sector.

Chart forFirst Trust NYSE Arca Biotech Index (FBT)


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