Even before Roche's offer to buy Genetech (NYSE:DNA) earlier this week, the biotechnology industry had performed well, especially since early June when the S&P 500 began a month-and-a-half long 11% decline.

Biotechnology exchange-traded funds (ETFs) like the SPDR S&P Biotech (AMEX:XBI), First Trust AMEX Biotechnology Index (AMEX:FBT), and Biotech HOLDRS (AMEX:BBH) have performed like a non-correlated asset group immune to the dreads of the overall market. Before choosing the fund with the hot hand of the day, it's important for investors to note how the composition of a fund can relate to its short term and long term performance results. In this article we'll explore the three biotech ETFs mentioned above, to show that what looks good today, may not be nearly as attractive a year from now. (For everything you need to know about this investment product, check out our Exchange-Traded Funds Feature.)

Near and Far
Since the beginning of the year:

  • Biotech HOLDRS (BBH) is up just over 18%.
  • The SPDR S&P Biotech (XBI) fund is up only 8%.
  • First Trust AMEX Biotechnology Index (FTB) is barely out of negative territory.

If we expand our time horizon out to three years, we find a different story:

  • BBH is just barely in positive territory.
  • XBI returned 46%.
  • FTB returned 24%.

What's Got Into BBH?
BBH is a more focused fund than the other ETFs mentioned with 60% of its holdings split between leading cancer drug maker Genetech and infectious disease fighter Gilead Sciences (Nasdaq:GILD). BBH has had a volatile three-year period only recently surpassing returns above those offered by the S&P 500. If you're bent on adding BBH to your portfolio you should also consider adding additional diversification in this space.

Best Bet - XBI's Diversity
XBI almost evenly allocates funds to its 24 biotech positions. Its top three holdings cancer drug maker Celgene (Nasdaq:CELG), cancer patient treatment provider ImClone Systems (Nasdaq:IMCL), and oral anticancer drug maker Onyx Pharmaceuticals (Nasdaq:ONXX) are popular among most of the Biotech ETFs, but XBI's even allocation sets it apart. Other well performing holdings year to date include Genetech and infectious disease fighter Vertex Pharmaceuticals (Nasdaq:VRTX). Be advised that the fund does have a relatively high turnover at rate 74%. (To better understand ETF holdings, read An Inside Look At ETF Construction.)

Runner Up - FTB
FBT is barely in positive territory since the beginning of the year but its investments in Vertex Pharmaceuticals, genetic variation decoder Illumnia (in route to personalized drug treatment), Genetech and Celegene have recently helped lift the fund out of negative territory since the beginning of the year. FBT holds only 20 stocks, but it also has a much lower turnover ratio of 11% and its investments are more evenly divided than the BBH fund.

Parting Thoughts
The list of diseases and aliments in need of a cure is long, giving biotechnology a prominent position in the minds of investors. Diversification is the key to building any successful portfolio. If you choose to concentrate in any one direction, try to find a complimentary investment to carry part of the load.

For further reading, see How To Use ETFs In Your Portfolio.

Related Articles
  1. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  2. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  5. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  6. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  7. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  8. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  9. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  10. Mutual Funds & ETFs

    Best 3 Vanguard Funds that Track the Top 500 Companies

    Discover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Trading Center