Earlier this year we wrote an article on Investor Uprising comparing returns on biotech funds and major ETFs. At the time ETF’s were outperforming managed mutual funds. Now as we enter the strong quarter for small cap and biotech Fidelity Select Biotech (FBIOX) has pulled ahead of ETFs. As of November 14 FBIOX is up 7.92% compared to 1.87% for the IBB ($94.62) and -1.87% for the XBI($61.93). Our current favorite ETF for tech http://idsn.com/imc/ and biotech is QQQ ($57.79)up 6.74% YTD. Over the past 3 months, an extremely volatile period, the QQQ is up 7.17% compared to 1.48% for the IBB. As a comparison also note that the broader based T.Rowe Price Health Sciences Fund (PRHSX) is also up 7.3% YTD. PRHSX includes not only biotech stocks but services and devices. It is also interesting to note that PRHSX has a Morningstar 4 star rating whereas FBIOX has only 2 stars, somewhat of a disparity.
We have not done a detailed analysis of why FBIOX is outperforming but some of the reasons are:
- Overweight in large caps and big movers like Biogen (BIIB),Gilead (GILD), and Regeneron (REGN).
- Excellent stock picking with emerging players like Biomarin (BMRN) and Pharmasset (VRUS).
- Avoidance of big whacks like Illumina (ILMN) down 40% over 3 months. Also the tools and diagnostics sector have been weak.
The iShares IBB has more weight on tools and diagnostics and diagnostics sector for example with positions in Illumina(ILMN), Life Technologies(LIFE) and Qiagen (QGEN).
The XBI in contrast included many more speculative, momentum driven, less liquid biotech stocks that were hit harder by the summer meltdown or news such as Amylin (AMLN), Dendreon (DNDN), Human Genome (HGSI), Myriad Genetics( MYGN) and Theravance (THRX).
We have recommended that ETFs be used to balance biotech portfolios to lower volatility.
It is also interesting to note that many other large Fidelity Funds unrelated to biotechnology have taken larger positions in mid-cap, more speculative biotech companies. More on this later.