Biotech Bull Market: Top ETFs Outperform Mutual Funds Over 2 Years

Can Healthcare/Biotechnology Funds Outperform ETFs in 2015?

In January of 2013 we compared three of the most liquid life science ETFs to some of the top mutual funds in the sector. Review our 2013 summary but the conclusion at that time was that ETFs provided better returns than mutual funds over a five year period ending 12/30/12. For example the five year total returns were as follows:

  • Total five year ETF returns were IBB up 75.8% and the XBI up 58.2%.
  • Total five year mutual fund returns were Fidelity Select Biotechnology Fund (FBIOX) up 72.3% and T.Rowe Price Health Sciences (PRHSX) up 52%.
  • The First Trust NYSE Arca Biotechnology (FBT) began to outperform others in Q1 2013 and we subsequently recommended it as the core biotech holding. But overall ETF performance can vary from quarter to quarter with XBI tending to be more volatile.

Since January 2012 the life science sector has accelerated more to the upside with no major sell-off in 2013 and one “mini-bubble” followed by a severe correction in Q1 2014.  The best year for biotech stocks was 2014 with the FBT  up 40% and other ETFs up around 30%. However since hitting all time highs in late January, biotech and healthcare stocks have been weak to flat although still up YTD. A CNBC report (2/4/15) on “Fast Money” says money is still moving into the top 3 ETFs with $225M YTD. What can we learn from comparative performance of the ETFs and Funds?

Here is performance (prices as of 2/1/15) of selected ETFs  for 1 year and 5 years:

  • First Trust NYSE Arca Biotechnology (FBT): 45%,  273%   Market Cap $2.53B
  • SPDR S&P Biotech (XBI) : 30.8%, 255.5%   Market Cap $1.82B
  • iShares NASDAQ Biotechnology Index (IBB): 30%, 284%    Market Cap $7.31B
  • Power Shares Dynamic and Genome (PBE):  25.6%, 211.4%  Market Cap $504M

Here is the performance of six leading life science and biotechnology mutual funds:

Fidelity Select Biotechnology Portfolio (FBIOX) 31%, 254% Total Assets $11B

T. Rowe Price Health Sciences (PRHSX) 17.6%, 172.6% Total Assets $11.77B

Franklin Biotechnology Discovery (FBDIX) 22.3%,  $198% Total Assets $1.7B

Rydex Basic Biotechnology Fund (RYBOX)  21.9%, 238% Total Assets $542M

Black Rock Health Sciences Opp. (SHSAX) 20.7%, 85.5% Total Assets $4.78B

Janus Global Life Sciences ClA (JFNAX) 20.1%,  158.6% Total Assets $3.1B

So the question is, how do ETFs beat managed funds? Can the “bots” and “algos” stay ahead of the game? Are humans too slow or cautious unable to add new hot stocks? Technical analysis is more important than ever so analytical software is important. It will be interesting to see how the XBI performs because of their focus on smaller stocks, rapid re-balancing and equal weighting, a different approach than other ETFs. Our top ETF pick remains FBT but we will be reassessing this weekly especially during sell-offs in biotech.

Managing A Life Science Portfolio

Over the past two years you would have outperformed the S&P 500 and made over 100% with two ETFs- the FBT and the IBB. For a more balanced approach going forward in 2015 you could buy two ETFs (FBT,IBB) and one fund, the Fidelity Select Biotechnology Portfolio (FBIOX). Keep in mind that biotech stocks had a hot hand in 2014, hard to duplicate, and there tends to be at least one major 5% correction. And of course trading individual stocks will provide many opportunities.

  1. The FBT is the current  leader outperforming all other ETFs by at least 10% since 10/1/2014. FBT has been our recommended core position in biotech. As we enter the sixth year of the bull market we would expect more volatility an opening for actively managed mutual funds to close the performance gap over ETFs. Look for Fidelity (FBIOX) and others to catch up.
  2. XBI tends to outperform when trading is bullish and underperform in down markets because of smaller cap weightings. XBI is a good vehicle for trading and rebalancing portfolios.
  3. Over the past six months individual small cap biotech stocks have soared driven by speculation, for example the CAR-T stocks. Biotech funds and ETFs showed considerable investor inflows in 2014  driving up prices.
  4. Seven large cap biotech stocks are still the core holdings in most funds and ETFs: ALXN AMGN, BIIB, CELG, GILD, REGN, VRTX.
  5. With the exception of larger cap “tools and diagnostics” stocks like Illumina (ILMN) and ThermoFisher (TMO) most ETFs are overweighted in biopharmaceuticals so a fund like T.Rowe Price (PRHSX) offers good diversification. However, the tools and diagnostic sector is still a stock pickers game.
  6. The Healthcare Select SPDR ETF (XLV) should be a leading indicator of strength or weakness in the sector as earnings and fundamentals come more into play. Large cap pharmaceutical stocks are among the holdings. The XLV is up 61% over two years.
  7. Review the Rayno Life Science picks  in 3 motifs for new investment and trading ideas.

Disclosure: Long FBIOX and a dynamic portfolio of long and short biotech stocks.

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