Tag Archives: biotechnology

Biotech ETFs Looking Attractive After Sell-Off

The biotech sector has long been the investors’ darling and the stocks saw an enormous run from late 2011 till this past summer, rising 340%. But the recent global market rout took away the sheen away from the sector, which faced a double whammy when Democratic Presidential candidate Hillary Clinton tweeted on drug price limits and increased regulatory scrutiny. The tweet led to a brutal seven-day sell-off, sending the Nasdaq Biotechnology index into a deep bear territory with a decline of more than 25% from its July highs. With this, the index wiped out all of its gain made this year. While investors may want to consider staying on the sidelines for the time being given the bearish trend, risk tolerant long-term investors could consider this slump a buying opportunity, should they have the patience for extreme volatility. Reasons to Buy Despite the current slide, the outlook for the sector is quite promising. This is especially true as the biotech sector is still clearly outpacing the broad market index from the year-to-date look. In fact, the sector enjoyed a strong rally over the past five years, gaining nearly 250% versus the gain of 64.8% for the S&P 500 index. This trend is likely to continue thanks to promising drug launches, cost-cutting efforts, an aging population, ever-increasing demand for new drugs, ever-increasing healthcare spending, a merger & acquisition frenzy, expansion into emerging markets and the Affordable Care Act or Obamacare. Additionally, biotech stocks provide a defensive tilt to the portfolio amid political or economic turmoil. Further, most of the stocks have sold off sharply, making their valuations immense attractive at the current levels (read: The 3 Key Factors in Biotech ETF Investing ). Given the promising long-term trends and the sector’s high growth potential, biotech stocks are due for a rebound and will likely move higher this fall. While individual stock investing is certainly an option, a look at the top ranked biotech ETFs could be a lesser risky way to tap the same broad trends. Top ETF Choices We have found a number of ETFs that have the top Zacks ETF Rank of 2 or ‘Buy’ rating in the space and that are expected to outperform in the months to come. These have gained the most from the sector’s surge in yesterday’s trading session and thus have superior weighting methodologies, which could allow them to continue leading the biotech space higher (read: all the Top Ranked ETFs ). ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ) This fund targets companies with one or more drugs in Phase II or Phase III FDA clinical trials by tracking the Poliwogg Medical Breakthroughs Index. It is a small cap centric fund, having amassed $143.2 million in its asset base since its debut late last December. The product holds 82 stocks in its basket with a well-diversified portfolio as none of the security holds more than 4.89% of assets. The product charges 50 bps in fees per year from investors and trades in good average daily volume of around 143,000 shares. It gained 5.2% in yesterday’s trading session and nearly 7% in the year-to-date timeframe. iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) This fund provides exposure to 144 firms by tracking the Nasdaq Biotechnology Index and charging 48 bps in annual fees. With AUM of nearly $7.5 billion and average daily volume of about 2.1 million shares, this is the largest and the most popular ETF in the biotech space. The product is slightly concentrated on the top five firms, which makes up for at least 8% share each. Other firms hold less than 4.10% of total assets. IBB gained 4.8% in yesterday’s trading session and is down 4.6% in the year-to-date time frame. SPDR Biotech ETF (NYSEARCA: XBI ) With AUM of $2 billion and average daily volume of 4.2 million shares, XBI is extremely liquid and an easily traded fund. It provides equal weight exposure across of around 1% to 103 stocks by tracking the S&P Biotechnology Select Industry Index. This suggests that the product has no concentration issue and offers huge diversification benefits. The product has a definite tilt toward small cap securities, as mid and large caps account for around 10% each. It charges a relatively low fee of 35 bps a year for the exposure. The ETF added 3.7% yesterday and is down 3.1% so far this year. BioShares Biotechnology Products ETF (NASDAQ: BBP ) This ETF follows the LifeSci Biotechnology Products Index, which measures the performance of biotechnology companies with a primary product offering that has received the U.S. Food and Drug Administration approval. Holding 38 stocks, the product has moderate concentration across components with each holding less than 5.5% share. Small caps dominate with 60%, followed by 25% in large caps and the rest in mid caps. The product has accumulated AUM of about $21.7 million since its debut last December and charges 85 bps in fees per year. Volume is light trading under 27,000 shares a day. BBP rose 3.5% yesterday and has returned about 2% in the year-to-date timeframe. Link to the original post on Zacks.com

FSTA: This Little Gem Of An ETF Is Beautiful When You Look Inside

Summary FSTA tracks one of my favorite sectors and there is nothing to hold against it. From the market capitalizations of the companies down to the top 10 holdings, everything looks intelligently designed. While many consumer staples ETFs would be scared to go overboard on tobacco, FSTA gets it. Consumer Staples funds should be loaded up on companies producing addictive products. I’m a little concerned about the sheer size of the allocations to Coca-Cola and Pepsi because of a movement towards healthier foods. I wouldn’t want to cut out those holdings because I think the distribution and branding systems give them moats for competing in healthy foods. One of the sectors I’ve come to like is the consumer staples sector. Unfortunately, many investors seem to be catching on to how desirable the sector allocation is when there are concerns of a new correction or recession. One of the funds that I’m considering is the Fidelity MSCI Consumer Staples Index ETF (NYSEARCA: FSTA ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expense Ratio The expense ratio on the Fidelity MSCI Consumer Staples Index ETF is only .12%. This fund gets my stamp of approval for giving investors consumer staples exposure at a very reasonable expense ratio. Market Cap The ETF has a focus on large capitalization companies, but investors should be worried if this chart looked different. The idea is to load up the portfolio on big companies that are designed to withstand negative events in the economy. I think large companies make more sense than smaller companies in that aspect because I want to see companies that are market leaders with strong pricing power in an established industry. Geography There really isn’t much to talk about here. This is all domestic equity. Sector This sector breakdown is excellent. Personally, I have a moral objection to companies that sell tobacco products because they cause cancer. On the other hand, I don’t have a moral objection to risk adjusted returns. The result of that conflict is that I have to admire the structure of this portfolio. I’d love to see a further breakdown in some categories such as beverages because I’d value having some alcohol in the portfolio as well. When I’m looking at consumer staples, I want companies that sell products that are absolutely addictive. This is just cold hard logic. Market leaders that can dictate pricing on addictive products are in the ideal position to survive recessions without a major drop in sales or earnings. Largest Holdings This is a solid batch of holdings. I don’t see a single company on the list that looks exposed to a recession. I’ll admit that having both Coca-Cola (NYSE: KO ) and Pepsi (NYSE: PEP ) at the top of the portfolio feels a little heavy. If I was going to tweak the portfolio a little, I might drop those two in favor of having a little more alcohol. My big concern about those companies is that I believe we are in a very long term shift towards healthier food and some of their branding value is going to be lost. The reason I would still want a significant allocation is because they are both masters of building brands and have established enormous distribution networks across the world. When (or if) that sustained shift to healthier foods does occur, I expect both Pepsi and Coke to be in position to buy up smaller companies with the right products and then run the products through their branding and distribution product. Simply put, even if they don’t have the right products yet, they have incredible economic moats that should help them acquire the right products and utilize those products better than smaller competitors could. As I’ve been going through consumer staples ETFs, I’ve noticed that Wal-Mart (NYSE: WMT ) is suspiciously absent from some of them. I think that is a mistake. I really like Wal-Mart as a dividend growth company and I think the employee wage issues are overblown . Building the Portfolio The sample portfolio I ran for this assessment is one that came out feeling a bit awkward. I’ve had some requests to include biotechnology ETFs and I decided it would be wise to also include in the related field of health care for a comparison. Since I wanted to create quite a bit of diversification, I put in 9 ETFs plus the S&P 500. The resulting portfolio is one that I think turned out to be too risky for most investors and certainly too risky for older investors. Despite that weakness, I opted to go with highlighting these ETFs in this manner because I think it is useful to show investors what it looks like when the allocations result in a suboptimal allocation. The weightings for each ETF in the portfolio are a simple 10% which results in 20% of the portfolio going to the combined Health Care and Biotechnology sectors. Outside of that we have one spot each for REITs, high yield bonds, TIPS, emerging market consumer staples, domestic consumer staples, foreign large capitalization firms, and long term bonds. The first thing I want to point out about these allocations are that for any older investor, running only 30% in bonds with 10% of that being high yield bonds is putting yourself in a fairly dangerous position. I will be highlighting the individual ETFs, but I would not endorse this portfolio as a whole. The portfolio assumes frequent rebalancing which would be a problem for short term trading outside of tax advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. Because a substantial portion of the yield from this portfolio comes from REITs and interest, I would favor this portfolio as a tax exempt strategy even if the investor was frequently rebalancing by adding new capital. The portfolio allocations can be seen below along with the dividend yields from each investment. Name Ticker Portfolio Weight Yield SPDR S&P 500 Trust ETF SPY 10.00% 2.11% Health Care Select Sect SPDR ETF XLV 10.00% 1.40% SPDR Biotech ETF XBI 10.00% 1.54% iShares U.S. Real Estate ETF IYR 10.00% 3.83% PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB 10.00% 4.51% FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT 10.00% 0.16% EGShares Emerging Markets Consumer ETF ECON 10.00% 1.34% Fidelity MSCI Consumer Staples Index ETF FSTA 10.00% 2.99% iShares MSCI EAFE ETF EFA 10.00% 2.89% Vanguard Long-Term Bond ETF BLV 10.00% 4.02% Portfolio 100.00% 2.48% The next chart shows the annualized volatility and beta of the portfolio since October of 2013. (click to enlarge) Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. You can see immediately since this is a simple “equal weight” portfolio that XBI is by far the most risky ETF from the perspective of what it does to the portfolio’s volatility. You can also see that BLV has a negative total risk impact on the portfolio. When you see negative risk contributions in this kind of assessment it generally means that there will be significantly negative correlations with other asset classes in the portfolio. The position in TDTT is also unique for having a risk contribution of almost nothing. Unfortunately, it also provides a weak yield and weak return with little opportunity for that to change unless yields on TIPS improve substantially. If that happened, it would create a significant loss before the position would start generating meaningful levels of income. A quick rundown of the portfolio I put together the following chart that really simplifies the role of each investment: Name Ticker Role in Portfolio SPDR S&P 500 Trust ETF SPY Core of Portfolio Health Care Select Sect SPDR ETF XLV Hedge Risk of Higher Costs SPDR Biotech ETF XBI Increase Expected Return iShares U.S. Real Estate ETF IYR Diversify Domestic Risk PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB Strong Yields on Bond Investments FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT Very Low Volatility EGShares Emerging Markets Consumer ETF ECON Enhance Foreign Exposure Fidelity MSCI Consumer Staples Index ETF FSTA Reduce Portfolio Risk iShares MSCI EAFE ETF EFA Enhance Foreign Exposure Vanguard Long-Term Bond ETF BLV Negative Correlation, Strong Yield Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio. Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. (click to enlarge) Conclusion FSTA has a great expense ratio, great sector, and great allocations within the sector. This ETF is a slam dunk for long term holdings. The only concern I have about the sector right now is that other investors have caught on and started bidding up the price. There is one other worrying factor for the ETF. The average volume on it is quite dreadful. There are two ways to look at that issue. One is to bemoan the weak trading volume increasing the bid-ask spread. The other option is to look for ways to trade the ETF without commissions and then to keep using limit orders to try to enter at an attractive price. The ETF has far more liquidity problems than the underlying securities and the low expense ratio is fairly attractive for investors looking for a long term holding. The biggest caution here is that investors should avoid using any “market” orders. Only trade this one with limit orders.

XBI: An Aggressive ETF That Keeps Capturing Massive Returns

Summary XBI is an almost pure play on the biotechnology sector. For investors that want to rely on modern portfolio theory rather than assessing biotechnology companies, this is a solid option. The ETF has shown stronger correlations with international equity than domestic equity which suggests investors may want to limit international exposure when going heavy XBI. The negative correlation for XBI with long term treasury bonds is only mediocre. Compared to the S&P 500, it is more difficult to diversify away the portfolio risk through treasuries. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. The biotechnology sector has been hot and despite being high risk it can be a very profitable area to invest. The challenge is that investors either need specialized knowledge to pick the companies they will hold or a simple strategy for buying into an ETF in the sector. As you might guess, I prefer the second method. My strengths are in analyzing ETFs and mREITs. I’d rather not be forced to figure out which biotechnology companies are most likely to patent the next breakthrough. That makes using an ETF a great way to get exposure. One of the biggest options for that exposure is the SPDR Biotech ETF (NYSEARCA: XBI ). Expense Ratio The expense ratio on XBI is .35%. Sector XBI is not confused about their role. The portfolio is very close to a pure play on the biotechnology sector. Largest Holdings The largest holdings are shown in the chart below: While I usually recognize all the companies within an ETF, this isn’t one of those cases. I know precisely zero of these companies, but I do appreciate that the fund has been designed to be relatively equal weight. For comparison, I also grabbed a chart of the holdings for the index. Index Holdings You may notice that the order of holdings is very materially different. XBI is not just passively tracking the index. Investors might think that means their returns would be very different from the index, but it turns out they actually track the index quite closely. Comparison The following chart shows the performance numbers for several time periods: (click to enlarge) Some investors may have a much easier time visualizing the returns with graphs, so I grabbed a bar chart as well: (click to enlarge) I think the bar chart really drives this home. Even though XBI is using a very different portfolio structure than their index, they have extremely similar returns over each time period. When I check an ETF against their index, I usually expect them to slightly underperform because of the expensive ratio. They have trailed their index, but only by around .05% on an annualized basis which is very good when you consider that the expense ratio is .35%. If they can continue to deliver that performance over the next decade it will be a testament to the management doing a solid job of deciding which companies deserve to be overweight in the portfolio. Building the Portfolio The sample portfolio I ran for this assessment is one that came out feeling a bit awkward. I’ve had some requests to include biotechnology ETFs and I decided it would be wise to also include a the related field of health care for a comparison. Since I wanted to create quite a bit of diversification, I put in 9 ETFs plus the S&P 500. The resulting portfolio is one that I think turned out to be too risky for most investors and certainly too risky for older investors. Despite that weakness, I opted to go with highlighting these ETFs in this manner because I think it is useful to show investors what it looks like when the allocations result in a suboptimal allocation. The weightings for each ETF in the portfolio are a simple 10% which results in 20% of the portfolio going to the combined Health Care and Biotechnology sectors. Outside of that we have one spot each for REITs, high yield bonds, TIPS, emerging market consumer staples, domestic consumer staples, foreign large capitalization firms, and long term bonds. The first thing I want to point out about these allocations are that for any older investor, running only 30% in bonds with 10% of that being high yield bonds is putting yourself in a fairly dangerous position. I will be highlighting the individual ETFs, but I would not endorse this portfolio as a whole. The portfolio assumes frequent rebalancing which would be a problem for short term trading outside of tax advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. Because a substantial portion of the yield from this portfolio comes from REITs and interest, I would favor this portfolio as a tax exempt strategy even if the investor was frequently rebalancing by adding new capital. The portfolio allocations can be seen below along with the dividend yields from each investment. Name Ticker Portfolio Weight Yield SPDR S&P 500 Trust ETF SPY 10.00% 2.11% Health Care Select Sect SPDR ETF XLV 10.00% 1.40% SPDR Biotech ETF XBI 10.00% 1.54% iShares U.S. Real Estate ETF IYR 10.00% 3.83% PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB 10.00% 4.51% FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT 10.00% 0.16% EGShares Emerging Markets Consumer ETF ECON 10.00% 1.34% Fidelity MSCI Consumer Staples Index ETF FSTA 10.00% 2.99% iShares MSCI EAFE ETF EFA 10.00% 2.89% Vanguard Long-Term Bond ETF BLV 10.00% 4.02% Portfolio 100.00% 2.48% The next chart shows the annualized volatility and beta of the portfolio since October of 2013. (click to enlarge) Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. You can see immediately since this is a simple “equal weight” portfolio that XBI is by far the most risky ETF from the perspective of what it does to the portfolio’s volatility. You can also see that BLV has a negative total risk impact on the portfolio. When you see negative risk contributions in this kind of assessment it generally means that there will be significantly negative correlations with other asset classes in the portfolio. The position in TDTT is also unique for having a risk contribution of almost nothing. Unfortunately, it also provides a weak yield and weak return with little opportunity for that to change unless yields on TIPS improve substantially. If that happened, it would create a significant loss before the position would start generating meaningful levels of income. A quick rundown of the portfolio I put together the following chart that really simplifies the role of each investment: Name Ticker Role in Portfolio SPDR S&P 500 Trust ETF SPY Core of Portfolio Health Care Select Sect SPDR ETF XLV Hedge Risk of Higher Costs SPDR Biotech ETF XBI Increase Expected Return iShares U.S. Real Estate ETF IYR Diversify Domestic Risk PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB Strong Yields on Bond Investments FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT Very Low Volatility EGShares Emerging Markets Consumer ETF ECON Enhance Foreign Exposure Fidelity MSCI Consumer Staples Index ETF FSTA Reduce Portfolio Risk iShares MSCI EAFE ETF EFA Enhance Foreign Exposure Vanguard Long-Term Bond ETF BLV Negative Correlation, Strong Yield Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio. Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. (click to enlarge) Conclusion XBI is an extremely aggressive allocation that easily brings in the heaviest level of risk in the portfolio. Despite being a major source of risk, the correlation with the S&P 500 is only .56% and the resulting beta is “only” 1.44 which is very good when you consider how volatile the ETF has been. The thing that may be even more interesting is what happens when investors run the regression over a longer period. When I extended the sample period back to February of 2006, the correlation goes up to .68 but the beta drops down to .91 because the ETF was dramatically less volatile in the earlier years. Lately the sector has been substantially more volatile. The strong performance of XBI also extends back quite a ways. Since February 2006 the ETF has returned over 400%. I also extended this sample by running another regression of returns on XBI against a long term government bond index. The negative correlation in that case came in at -.35 compared to the S&P 500 coming in at -.54. The risk that comes from the weaker negative correlation is that it makes it more difficult to really drive portfolio risk lower. However, for an investor that is willing to hold a portfolio that is already overweight on equities, it would seem perfectly reasonable to include XBI as an allocation. It is a highly aggressive allocation, but it has done very well. The one other interesting note that I would make in that regard is that it has shown a substantially higher correlation with international ETFs than with domestic equity. If you’re planning to run XBI as a large holding, you may want to consider reducing the international equity allocation.