Biotech ETFs – Genetic Differences

Biotech ETFsA current investment hypothesis has Biotech stocks outperforming the market because they are less sensitive to the economic slow down.

As the WSJ’s Jacob Goldstein puts it, people may put off buying that new car or upgrading their computer, but they’re not going to stop buying medicine in the first round of belt tightening. That is especially true for the cancer-fighting and other essential medicines that biotech companies develop and produce.

A review of the one-year chart of the Amex Biotech Index (Amex: ^BTK) vs. the S&P 500 shows a clear outperformance on the part of biotech stocks over the past 12 months:

Two Biotech ETFs make it possible to invest in the biotech industry at low cost. The $1.4 billion iShares Nasdaq Biotechnology ETF (Amex: IBB) tracks an index of 166 biotech stocks that are traded on Nasdaq. State Street’s SPDR S&P Biotech ETF (Amex: XBI) tracks an index of 30 biotech stocks traded across all of the exchanges.

Despite the similarity of the holdings of the two funds, the one year chart shows a clear difference in performance with the smaller State Street fund ahead for the period:

So what is causing the performance difference?

One major XBI holding that IBB doesn’t own is Genentech (NYSE: DNA). However, DNA has underperformed the industry and the market over the past year, so that would work against XBI.

With only 30 holdings, XBI is much more concentrated than IBB which is spread across several dozen stocks. In this case, XBI happened to own the right 30 stocks. For example, Gilead Sciences (Nasdaq: GILD) is up almost 40% in the past year.

The other difference between the funds is that XBI is equal weighted across the 30 stocks while IBB is market cap weighted. That means XBI has a better chance of a long shot impacting overall performance while IBB is more affected by its top 2 or 3 holdings.

For more information, see the iShares and State Street websites.

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