Category Archives: amex

Summary This established Biotech ETF has an interesting structure but also is quite volatile. With $3.28BLN in assets, will the institutions continue to invest in 2016? We answer these questions and provide our recommendation on this top performer. The First Trust NYSE Arca Biotechnology Index ETF (NYSEARCA: FBT ) is an equal weighted passively managed fund with an established track record, (inception 06/19/2006). The fund seeks to replicate as close possible, before fees and expenses, the price and yield of the NYSE Arca Biotechnology Index, (previously the Amex Biotechnology Index). The interesting structure of the ETF is the 30 components, (previously 20 components prior to October 20, 2014). What is challenging for shareholders is the quarterly rebalancings that occur in late January, April, July and October. Due to the equal weighting objective of the Fund and the underlying Index and the general small to mid-cap nature of the sector, these rebalancings and the ETF, in general, can be volatile. We will analyze the structure of the ETF, its holdings, performance and fees and provide our recommendation. 100% of the ETF is in common equity holdings. Our Market Cap is quite simple, with most of our sources agreeing: FBT Market Capitalization Market Cap Weight Mid cap 34.98% Small cap 33.10% Large cap 31.98% These numbers were courtesy of Fidelity, with xtf.com extremely close in agreement. Morningstar, as we previously noted uses a slightly difference nomenclature. Their breakdown is: Medium at 40.56%, Small at 27.19%, Large at 23.12%, and Giant at 9.12%. Categorically we can state that the majority of the firms in this ETF are small to mid-cap firms with limited products presently, if any, in the marketplace. In terms of the style of the underlying components, it is quite clear to investors who have participated in this space. FBT Ownership Style Style Weight Growth 59.80% Pure Growth 30.00% Blend 7.10% Value 3.10% Without a doubt this ETF is a growth vehicle and not intended for those seeking value investments. Morningstar states that the ownership style is mid or medium and is considered high growth. In terms of currency and countries of the holdings it is somewhat interesting. FBT Country and Currency Exposure Country Weight Currency Weight United States 89.90% United States dollar 89.90% Ireland 3.68% Euro 10.10% Spain 3.23% NA NA Netherlands 3.19% NA NA Our country and currency exposure here is clearly US geographically focused with some Eurozone exposure as noted. The 10.10% euro weighting will not adversely impact this ETF even with the euro possibly moving below dollar-euro parity. As such, we have no issues with the underlying geographical or currency weightings. It is quite clear that the overall sector is 100% healthcare in FPT. The industry exposure is informative. Industry Weight Biotechnology 79.27% Life Sciences Tools & Services 16.29% Pharmaceuticals 4.47% While this is in no way diversified, it does show that there are companies within the ETF which are not pure biotech, but are grouped within the fund. Some of them we do recognize from previous research and there is one firm that we previously analyzed and recommended. We will discuss this firm when we review the holdings. In terms of the holdings, as usual we will analyze the top 15 components, their symbols, ratings, (Moody’s and S&P), if any, and their weight within the ETF and the underlying index {BTK}. In this fund’s case we will also show their individual year to date and 12 month performance. FBT top 15 holdings Name/Symbol YTD perf/ 12 month Ratings, (Moody’s/S&P) Weight-BTF Weight- Index, {BTK} Nektar Therapeutics (NASDAQ: NKTR ) 0.71%/-3.27% NR/NR 4.47% 3.33% Dyax Corp. (NASDAQ: DYAX ) 165.50%/168.18% NR/NR 4.10% 3.33% Isis Pharmaceuticals, Inc. (NASDAQ: ISIS ) -7.92%/-0.25% NR/NR 4.09% 3.33% Alnylam Pharmaceuticals, Inc. (NASDAQ: ALNY ) 0.74%/-8.18% NR/NR 3.93% 3.33% United Therapeutics Corp. (NASDAQ: UTHR ) 20.08%/16.21% NR/NR 3.78% 3.33% Celldex Therapeutics Inc. (NASDAQ: CLDX ) -16.33%/-17.19% NR/NR 3.70% 3.33% Alkermes, PLC (NASDAQ: ALKS ) 22.49%/22.62% Ba3/BB 3.68% 3.33% Illumina, Inc. (NASDAQ: ILMN ) -4.60%/-7.27% NR/BBB 3.64% 3.33% Charles River Laboratories International, Inc. (NYSE: CRL ) 18.73%/18.41% Ba2/BBB- 3.57% 3.33% Novavax, Inc. (NASDAQ: NVAX ) 36.09%/46.99% NR/NR 3.48% 3.33% Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN ) -3.18%/-9.12% NR/NR 3.35% 3.33% Myriad Genetics, Inc. (NASDAQ: MYGN ) 25.54%/21.89% NR/NR 3.35% 3.33% Vertex Pharmaceuticals Inc. (NASDAQ: VRTX ) 2.52%/2.02% NR/NR 3.35% 3.33% Regeneron Pharmaceuticals, Inc. (NASDAQ: REGN ) 33.24%/25.67% Baa1/NR 3.32% 3.33% Amgen Inc. (NASDAQ: AMGN ) -0.62%/-5.91% Baa1/A 3.24% 3.33% The top 15 holdings represent 55.05% with an average of 3.67%, with the bottom 15 totaling 44.96%. This was expected with the equal weighting of the ETF. Unlike the index which is even at 3.33% or 1/30 for each holding, the ETF is adjusted for share price and an equal value. Based upon the individual performance of the top 15 holdings, it is fairly obvious that returns are not reasonably predictable without extensive analysis of each company, their future products and FDA approval developments. The equal weightings here do provide an opportunity of participating in one of the top performers, such as Dyax Corporation with a 165.50% return YTD. Obviously, the return on Dyax far outweighs the negative return of a firm such as Celldex Therapeutics at -16.33% YTD. The benefit of the ETF allows participation in a sector where returns can be quite diverse from one firm to another. In terms of credit ratings, only 14.13% (S&P) of the top 15 have ratings and only 25.66% of these 15 holdings. It is quite apparent that with the rapid growth and negative balance sheets of these firms, the majority of the firms are mostly lower grade credits, if rated at all. Only Illumina, Inc., Charles River Laboratories International, Inc and the well known Amgen Inc. are investment grade, as per S&P. One of the firms in the ETF with a weighting of 2.91% is our personal favorite, Quintiles Transnational Holdings, Inc (NYSE: Q ), a company we had previously analyzed and recommended. Quintiles is the leader in {CRO} services or a Contract Research Organization. The company basically performs many of the services that large pharmaceuticals and Biotech firms require to bring their product to market and to continue to develop new and existing products. This would include Consulting Services, Portfolio and Strategy Planning, Clinical Trial Execution, Laboratories, Real-World and Late Stage Trials, Technology Solutions, Patient and Provider Engagement, Product Marketing and Sales. We are a little surprised to see it in this ETF. It is a profitable and quite a large capitalized firm, yet it will continue to grow and profit as long as there is a need for their services from the healthcare sector. As such, we think it is a great way to participate in the overall growth of the firm (14.51% YTD/18.26% 12 month) balanced with the performance of the other holdings in the ETF. Based upon the components and structure we analyzed the overall performance of the ETF and the index. FBT’s Performance, Fees and Recommendation Category FBR {ETF} BTK {Index} Net Expense Ratio .58% NA Turnover Ratio 58.00% NA YTD Return 9.94% (11/30/15) 5.99% (12/07/15) 10.66% (11/30/15) 5.48% (12/07/15) 1-Year Total Return 10.08% (11/30/15) 5.56% (12/07/15) 10.79% (11/30/15) 5.58% (12/07/15) Dividend Yield/SEC Yield 0.17%/-0.43% NA Beta (Shares/Holdings) 1.13/.70 NA P/E Ratio FY1/current 29.60/26.93 NA Price/Book Ratio FY1/current 8.00/7.06 NA Our expense ratio is in-line with the asset class median of 0.53% and is quite acceptable. Our turnover ratio is only slightly surprising here. With an asset class median or 18.00%, we expected much higher. One of the reasons is the general nature of the sector and the rules of the ETF and the underlying index that cause firms to be replaced. According to the NYSE Arca: Components will be removed from the index during the quarterly review if they fail any of the criteria below: (1) Current Market Capitalization is lower than $900 million (2) The Average Daily Traded Value for the past 3 Months is lower than $900,000 (3) The Current Last Traded Price is less than $1.00 In addition, various corporate actions may cause the stocks in the index to be substituted. As there has been M&A activity and various other corporate actions in the sector over the past year, the high turnover ratio is to be expected here. In terms of the ownership of the ETF, it is readily apparent that institutions and funds hold large holdings. While Wells Fargo (NYSE: WFC ) holds 6.31% and Morgan Stanley Smith Barney LLC (NYSE: MS ) holds 8.81%, the big surprise holding is another ETF that we previously analyzed and recommended. The First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ), holds 33.99% of the total shares in its ETF or 24.20% of the total assets. The ETF has performed well due to its allocation in FBT, among others. FBT will continue to attract institutional shareholders and advisory clientele who seek allocation to the Biotech sector, regardless of economic conditions. In terms of economic conditions, many consider Biotech as being within the Pharmaceutical and medical space and defensive. We tend to agree, yet the cost of capital for the industry is always a concern. With interest rates set to rise this may be an issue for those firms which tend to borrow heavily to fund R&D. As such, though we are impressed with the performance over the past year the ETF is not for the squeamish. It is noted above that the YTD performance has dropped 4.00% since the end of November. The sector and its holdings are not for investors who are looking for the short term. A dollar cost strategy may be appropriate for investors who are familiar (or not familiar) with the frequent market routs. In terms of FBT the year high on July 20,2015 was $132.21 representing at that time a 28.96% YTD return, while the year low of $64.08 set on August 24,2015, after the Asia sell off, represented a loss of -37.49% YTD at that time. Overall, the volatility of the sector has not dissuaded institutional investors, (or speculators for that matter) from participating in this ETF or the sector. As the second largest biotech ETF, after the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) it continues to represent an attractive vehicle to participate in a sector that will continue to produce new drugs and redevelop existing treatments. We are a strong buy on this ETF into 2016 and beyond.