Biotech ETFs: A Fiscal Cliff Safe Haven? (IBB, XBI, FBT, BBH, SQNM, GILD, MYGN, BMRN, AMGN)
Eric Dutram: With the election over, many investors assumed that one of the key risk events for U.S. markets was past us. However, this certainly hasn’t been the case, as the election worries were just replaced and expanded upon by fiscal cliff terror.
This panic over across the board tax hikes and trillions in spending cuts has pushed many investors to sell out of a great deal of their stocks with a special focus on many of the year’s top performers. This movement to selling, coupled with more European woes and uncertain domestic data, has pushed stocks across the board sharply lower over the past week as the rush for the exits continues.
The impact on stocks has been especially felt in dividend-focused securities, although a number of other segments were also hit hard. Seemingly, not a single sector has been immune from the selling pressure, leaving many investors to wonder where is still safe to put assets at this time (read Invest like Warren Buffett with These ETFs).
Although it took a bit of digging, we have found one corner of the equity world that hasn’t seen a rash of selling over the past week; biotechnology. This corner of the health care industry has held up surprisingly well despite the market turmoil and it has pretty much been a safe haven in this shaky economic environment; a speck of green in what has turned into a sea of red.
This is somewhat surprising given that many biotech stocks have been strong performers in 2012, and over the past few years, have been among the biggest gainers in the entire equity world. As a result, one might assume that they would be subject to intense selling in order to lock in low tax rates, but that has not been the case, at least so far.
There is also a deal of uncertainty over Affordable Care Act implementation and how it will actually impact the various health care sectors. Many don’t believe that biotechs will be the worst hit, but with more lax rules on generics and the prospect of increased competition, this could be the case even if patient rolls expand (read Top Zacks Ranked Healthcare ETF in Focus).
Confluence of Factors
With these points, it seems questionable that biotechs would be leading the way in the space, but there is one thing that the sector does have going for it, dividends, or really the lack there of. Biotechs aren’t exactly a yield destination so there hasn’t been as much panic selling in this segment as opposed to other corners of the health care world.
In addition to this, the earnings picture remains pretty solid for biotechnology firms as a whole, although this space can have extremely divergent performances among the various components. Still, the Zacks industry of Medical- Biomedicine/Gene receives a pretty positive Zacks Rank overall, enough to put it roughly in the top 25%, at time of writing.
These factors of low dividend pressure and a decent earnings picture have been enough to outweigh broad selling of big winners and concerns over the ACA at this time. This tilt towards the positive has been enough for many biotech stocks, as well as ETFs, to outperform during this troubled time.
In fact, several of the ETFs in this space, which we highlight briefly below, have been performing rather well in this environment, losing less than the broad market, or in some cases, putting up a post-election gain (see Three ETFs to Prepare for the Fiscal Cliff)
While this may not continue if the selling pressure intensifies or if investors look to take gains out of this space before it is too late, for investors looking for a potential fiscal cliff safe haven, a closer look at any of the following four ETFs could be worthwhile:
iShares Nasdaq Biotechnology ETF (NASDAQ:IBB)
IBB is one of the more popular biotech ETFs on the market today with just under $2 billion in AUM and volume of roughly half a million shares a day. The product is also middle of the road in terms of expenses, with an expense ratio of 48 basis points a year.
The fund holds just under 120 stocks in total in its basket, with just over 50% of the assets going to firms that are smaller than large caps. Top stocks in the ETF include Regeneron Pharma (NASDAQ:REGN), Amgen (NASDAQ:AMGN), and Gilead (NASDAQ:GILD), all of which make up at least 8% of assets.
The fund has gained roughly 0.6% in the past five day period, easily beating out broad benchmarks.
SPDR S&P Biotech ETF (NYSEARCA:XBI)
Another popular choice in the biotech ETF market is XBI, a fund tracking the S&P Biotechnology Select Industry Index. The product has just over half a billion in assets and does more than a quarter million in volume, while its cost is just 35 basis points a year (readThree Biggest Mistakes of ETF Investing).
The fund has a smaller basket of stocks with just under 50 stocks in its basket, and only 18% in large cap securities. Micro and small caps dominate, while the top three holdings consist of BioMarin (NASDAQ:BMRN), Gilead (NASDAQ:GILD), and Myriad Genetics (NASDAQ:MYGN), all of which account for less than 4.1% of assets.
The fund is down about 0.8% in the past five days, although it should be noted this is mostly due to a weak Thursday performance and that this is still far better than the S&P 500.
First Trust Amex Biotechnology Index Fund (NYSEARCA:FBT)
First Trust’s entrant in the biotech market tracks the Amex biotechnology Index, utilizing an equal weight technique for its approach. The fund is more expensive at 60 basis points a year while volume and AUM are respectable at 50,000 shares a day and AUM of $200 million, although obviously less than others on the list.
Once again, large caps make up a small portion, just 30% of assets, while small and micro caps make up a plurality of assets. Top holdings include the aforementioned MYGN and BMRN, as well as Sequenom (NASDAQ:SQNM), each of which make up, on average, 6% of the fund.
FBT is down just 30 basis points in the past five days, easily beating out the S&P 500 in the same time frame while also possessing a Zacks ETF Rank of 2 or ‘Buy’ (see Three Defensive ETFs for a Bear Market).
Market Vectors Biotech ETF (NYSEARCA:BBH)
The least popular of the bunch—but still with a decent level of assets—is BBH a fund from Van Eck that tracks the Market Vectors US Listed Biotech 25 Index. The ETF has over $140 million in AUM and daily volume of about 30,000 shares, while it is also a lost cost pick with expenses of 35 basis points a year.
This is the only large cap centric fund on the list as it has over 55% of assets in that level and just 14% in small caps or micro caps. Additionally, it is somewhat concentrated from an individual security perspective with AMGN and GILD combining to take up about 30% of assets in this fund which only holds about 25 other stocks to begin with.
In this relatively short time period, BBH has been the best performer of the group adding about 2.4%. Probably, the fund was buoyed by its large cap focus when compared to the other choices in the space over the past week.
Long Term Outlook
While these four ETFs have managed to hold up in the face of extreme selling pressure, investors should note that the outlook for the space is very mixed. Current Zacks ETF Ranks range from ‘Buy’ to ‘Sell’ across the space, so there could be some volatility in this market.
This could be especially true as the impact of the Affordable Care Act is better known and the result of new policies regarding drug availability, patents, and ‘biosimilars’ truly hits the market.
Yet while the long term impact may be cloudy, the short-term is apparently quite bullish—at least relatively speaking—for this overlooked sector, suggesting it could be a decent play during this crisis environment as more fiscal cliff negotiations get underway.
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