The Rush to Biotech ETFs Is Back On (IBB, XBI)

The often politically sensitive healthcare sector displayed that sensitivity in positive fashion Wednesday as a variety of exchange-traded funds (ETFs) tracking the sector surged on news that Senate Republicans are close to unveiling new healthcare legislation. On Wednesday, 15 ETFs hit all-time highs, and eight of those were healthcare funds. One of those eight was a biotech ETF. That could be a sign that there is more room to run in the biotechnology space, in which 11 ETFs hit 52-week highs yesterday. That includes the iShares Nasdaq Biotechnology ETF (IBB) and the SPDR S&P Biotech ETF (XBI), two of the largest biotech ETFs.

IBB, the largest biotech ETF, and XBI are up 19.2 percent and 32.9 percent, respectively, year to date. That compares with a 16.6 percent gain for the Health Care Select Sector SPDR (XLV). XLV and rival cap-weighted healthcare ETFs usually devote 20 percent to 25 percent of their weights to biotech stocks, meaning that tactical investors could opt for pure-play exposure to the biotech sector with funds such as IBB or XBI. (See also: Biotech Funds Could Break Out.)

"Republican efforts to dismantle the Affordable Care Act, known as Obamacare, have created uncertainty this year for investors in the sector, but analysts doubt the Senate's proposal, expected on Thursday, will significantly throw off the overall group's momentum," reports Reuters. That is good news for the healthcare sector and biotechnology names, which languished last year as both presidential candidates openly chastised pharmaceutical companies regarding drug prices. Last year was the first since 2008 that the healthcare sector delivered negative annual returns.

Investors appear comfortable betting that political volatility for biotech ETFs will be muted. This month, investors have allocated nearly $23 million in new money to XBI, while IBB has seen inflows of $136.5 million. Recent flows into IBB make a dent in the ETF's year-to-date outflows of $376.7 million. Investors have been more enthusiastic about XBI, adding $158.1 million in new capital to that ETF this year. (See also: Why Biotech May Break Out From the Pack.)

XBI is an equal-weight ETF, whereas IBB is cap weighted. That gives XBI a potential performance advantage when smaller biotech stocks are surging, but it also makes the ETF more volatile than its cap-weighted peer. XBI's three-year annualized volatility is nearly 800 basis points higher than that of IBB.

Impressive earnings are fueling optimism for biotechnology and healthcare ETFs. First quarter results for the sector shored up confidence. "Eighty-four percent of healthcare companies topped analysts' first quarter earnings expectations versus 76 percent for the S&P 500 overall, according to Thomson Reuters I/B/E/S," reports Reuters. (See also: A Primer on the Biotech Sector.)

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