These days, investors are hearing plenty about biotech stocks and that group’s seemingly never-ending run higher. But when it comes to biotech exchange-traded funds … well, it is the same small group that garners most of the attention (and assets).
Year-to-date, the top four non-leveraged ETFs (and five of the top seven) on a percentage basis are biotech ETFs. That group includes familiar fare such as the iShares Nasdaq Biotechnology ETF (IBB); the First Trust NYSE Arca Biotechnology Index Fund (FBT), the second-largest biotech ETF behind IBB; and the SPDR S&P Biotech ETF (XBI), the third-largest biotech ETF by assets.
However, some of this year’s top-performing biotech ETFs are more hidden gems.
At least one is seasoned and has been on the market for some time, while others — including the absolute cream of the biotech ETF crop in terms of sheer performance — are rookie funds that aren’t even a year old. Despite their infant status, these ETFs are surging.
Here, then, are three unheralded biotech ETFs to consider buying now:
Biotech ETFs: PowerShares Dynamic Biotechnology & Genome Portfolio (PBE)
Expense Ratio: 0.59%, or $59 annually for every $10,000 invested
Of the trio of funds featured here, the PowerShares Dynamic Biotechnology & Genome Portfolio (PBE) is the oldest, having celebrated its 10th birthday on June 23. The $566.8 million PBE takes a different approach to biotech than rivals like the aforementioned IBB.
A traditional market capitalization-weighted biotech ETF like IBB is typically heavy on the industry’s largest stocks. Think Amgen (AMGN), Biogen (BIIB), Celgene (CELG) and Gilead Sciences (GILD). Those stocks combine for more than 32% of IBB’s weight.
On the other hand, Amgen, Biogen and Gilead combine for just 14.7% of PBE, and the ETF does not currently hold shares of Celgene. The difference is in weighting methodology. PBE’s 30 holdings are “based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action, and value,” according to PowerShares.
PBE’s way of evaluating stocks works. It was the fourth-best sector ETF last year, and over the past five years, the fund is up 220%.
Biotech ETFs: ALPS Medical Breakthroughs ETF (SBIO)
Expense Ratio: 0.5%
The ALPS Medical Breakthroughs ETF (SBIO) is one of the newest ETFs on the biotech block having debuted on Dec. 31, 2014.
But do not let SBIO’s rookie status be a determinant of the ETF’s investment merit, which is sound.
Coming to market in the midst of an epic biotech bull run has proven to be fortuitous timing, as the SBIO has needed less than six months to attract more than $124 million in assets, making it one of the most successful new ETFs to launch during that period.
More important than the superficial metric of assets is performance and SBIO has delivered the goods for investors. The ETF is up 44.1% since debuting, nearly double the 23.1% returned by IBB over the same period.
What makes SBIO compelling is how the ETF generates those returns. Like the aforementioned PBE, SBIO goes about its business in significantly different fashion than traditional biotech ETFs. SBIO holds 82 primarily mid- and small-cap stocks that have at least one drug in Phase II or Phase III trials. Current top holdings include Seattle Genetics (SGEN) and Receptos (RCPT).
That means the ETF has the potential to rocket higher on days when even just one of its constituents delivers positive trial data.
Biotech ETFs: BioShares Biotechnology Clinical Trials Fund (BBC)
Expense Ratio: 0.85%
Like SBIO, the BioShares Biotechnology Clinical Trials Fund (BBC) debuted in late December, but that is not the only thing the two rookie biotech ETFs share in common. BBC has a stellar performer in its own right, surging almost 33% since coming to market. That is enough to make BBC this year’s fourth-best ETF (SBIO is in the top spot).
And like SBIO, BBC is more focused compared to the older biotech ETFs on the market. BBC does not include pharmaceuticals companies as well as “medical devices and diagnostics; life science tools; specialty pharmaceuticals, generic drugs and outsourced drug delivery; healthcare services; contract research organizations; neutraceuticals; agricultural biotechnology; animal health; diversified healthcare; food sciences; information technology; and nanotechnology firms.”
Rather, the ETF only features biotech firms with at least one drug in a Phase 1, Phase 2 or Phase 3 trial.
BBC’s underlying index is equally weighted to help mitigate single-stock risk. The ETF’s lineup recently expanded to 90 stocks from 67.