State Street’s family of sector SPDR exchange-traded funds serves as a handy proxy for the long-term performance of the major investment sectors. And while the Technology Select Sector SPDR Fund (XLK) has been a sector leader with a 17.69 percent annualized return over the past decade, biotechs have been no slouch. The SPDR S&P Biotech ETF (XBI) has delivered a rock-solid 17.03 percent yearly return in that time.
Credit goes to a remarkable stretch of drug industry innovation, and it’s a trend seemingly with no end in sight. In the years ahead, advances in genetic engineering, cancer treatment, DNA technology and molecular biology should provide a continued flow of new blockbuster drugs to help biotech ETFs stay ahead of the pack.
This is one segment of the ETF landscape where the biggest might not be the best. With more than $8 billion in assets (and a 0.47 percent expense ratio), the iShares Nasdaq Biotechnology ETF (IBB) is the largest in its category but it’s emphasis on the largest biotech firms may be a drawback.
More than half of the fund’s assets are invested in large caps, and the average holding is valued at $17 billion. Trouble is, that approach fails to bring sufficient exposure to smaller-cap biotechs that can often be snapped up at sharp premiums when acquired.
“You really find a lot of innovation at smaller biotech companies,” says Ryan Issakainen, exchange-traded fund strategist at First Trust Advisors. His firm’s First Trust NYSE Arca Biotechnology Index Fund (FBT) gives equal-weighting to a diverse group of biotech firms in terms of market value. “That’s really helped drive our fund’s performance,” he says.
That fund has delivered an impressive 21.75 percent annualized return over the past decade. That tops the iShares fund’s 16.89 percent yearly return.
The First Trust fund, which has a 0.56 percent expense ratio and $2.7 billion in assets, is based on an underlying index of 30 firms selected by a committee at the New York Stock Exchange. Issakainen says the committee seeks exposure to various parts of biotech and avoids taking too narrow a slice of the market.
It’s In The Genes
Investors who want to more precisely target the most innovative trends taking place in biotech may want to consider the ARK Genomic Revolution Multi-Sector ETF (ARKG).
The fund owns firms that are focused in emerging biotech areas such as gene editing, targeted therapeutics, bioinformatics, molecular diagnostics, stem cells and agricultural biology.