Three Bogus Biotech ETFs... And One Great
One
The Dynamic Wealth Report
December 29, 2009
by Corey Williams, Editor
There’s been a lot of buzz around the office lately. One industry has us
on high alert as we prepare to enter the second decade of the 2000's.
There’s a slew of favorable factors coming together that could propel
the biotech industry to the stratosphere!
Now to be honest, the best way to maximize your profits investing in
biotech stocks is having a seasoned analyst guide you. And my fellow
analyst and editor, Robert Morris, is one of the best in the business.
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To reap maximum benefit from this coming boom, individual stocks are the
way to go. However, ETFs are my specialty. And ETFs do provide an
easy way to add a cross section of the biotech sector to your
portfolio.
The bottom line is… having some exposure to this sector’s explosive
potential is better than nothing at all.
But beware, all biotech ETFs aren’t created equal. Selecting the right
ETF in ’09 meant the difference between +45% returns and just breaking
even!
Clearly we need to look under the hood of the six different biotech ETFs
you can choose from. Here they are–
- Biotech HOLDRs (BBH)
- PowerShares Dynamic Biotech & Genome Portfolio (PBE)
- PowerShares Global Biotech Portfolio (PBTQ)
- iShares Nasdaq Biotechnology Index Fund (IBB)
- SPDR S&P Biotech ETF (XBI)
- First Trust Amex Biotechnology Trust (FBT)
Right off the bat I’ll throw out BBH, PBE, and PBTQ.
The Biotech HOLDRs (BBH) is one of the most bogus ETFs
I’ve seen. It doesn’t track an index so it doesn’t rebalance its
holdings. Over time, the success of a few companies has skewed the
holdings. About 80% of the ETF is invested in three large cap
companies. It really isn’t constructed in a fashion that’s suitable to
investing.
Number 2 and 3 on the bogus list are the PowerShares ETFs – PBE and
PBTQ. The guys over at PowerShares keep trying to come up with new and
inventive indexes for their ETFs to track. The problem is their new ‘intelidex’
ETFs consistently underperform other sector indices. (Who wants to own
the industry underperformers… I know I don’t!)
And here’s the icing on the cake. PBTQ only trades a few thousand
shares per day. It’s not liquid enough to support buy and sell orders.
This results in a huge bid – ask spread quickly eating into your
profits.
That leaves us with three possibilities – IBB, XBI, and FBT.
All three pass the basic ‘smell’ test. They trade enough volume to buy
and sell without worry. The fee structures are manageable. And, they
aren’t too heavily invested in a limited number of stocks.
So it comes down to past performance and index construction to pick the
best biotech ETF.
iShares Nasdaq Biotech Index Fund (IBB) holds 126
biotech stocks listed on the Nasdaq exchange. This ETF holds a large
cross section of small, medium, and large cap stocks. And it’s quite
possibly the best gauge of the biotech sector’s overall health. So far
the YTD return for IBB is just shy of 17%.
IBB is a market cap weighted index. That means they invest a small
amount of capital in small cap stocks. The underweighting of the small
cap stocks in the sector will keep IBB from fully capturing the
explosive potential of biotech investing.
SPDR S&P Biotech ETF (XBI) and First Trust Amex
Biotechnology Trust
(FBT) both hold far fewer stocks than IBB. And they have each
outperformed and underperformed IBB over periods of time.
XBI holds only 28 stocks representing a cross section of small, medium,
and large cap stocks. XBI’s drastically underperformed in ‘09. It’s
only managed to eek out a meager 1% gain YTD. XBI is a perfect example
of a great idea underperforming because the index it’s built on isn’t up
to par.
The best performing (and my favorite) biotech ETF of 2009 is the
First Trust Amex Biotechnology Trust (FBT).
FBT’s posted gains in excess of 45% this year! FBT's secret is an
equal dollar weighted index. This weighting method gives small
cap stocks a bigger influence than a market cap weighted index.
The secret is investing the same amount in the “Big Guys” as the small
start-ups. That way you get steady growth and explosive upside
potential.
So remember, when it comes to investing in biotech, the really explosive
gains come from small companies bringing new drugs and treatments to
market. This gives FBT an edge over other biotech ETFs year in and year
out.
***Editor's Note*** As the year winds down, we're
getting closer and closer to launching our new service,
Biotech Supertrader. This premium trading strategy
will focus on smaller biotech stocks with promising drugs and treatments
in the pipeline. It's a novel approach that has earth-shattering
potential in 2010. Stay tuned for more...
The IPO market caps off a busy fourth quarter this week. 75 IPOs have
been added to the Russell Global Index. 28 of those were US listed IPOs
who qualified for the US broad-market Russell 3000 Index. And 6 of those
were large enough to crack the large-cap Russell 1000.
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