Are Biotech ETFs Back On Track?

biotechnologyThe healthcare industry, especially its biotechnology corner, has been a great performer so far this year as evident from an impressive 43.64% gain in S&P biotechnology select industry index in the last one year (as of November 25, 2013). The credit for this bull run can at least partially be traced back to the approval of the Affordable Care Act in 2010.

The legislation, often known as ‘Obamacare’, was aimed at bolstering the number of insured Americans, should boost demand for Pharma and Medicare industry as a whole. The enrollment to purchase insurance plan under the law was carried out in October.

Also, increasing merger & acquisition activities, new investment havens in the under-penetrated emerging markets, several new drug approvals and steadily rising global health care spending assisted the sector to outperform the broader market.

In fact, to account for the rise in aging population and the consequent higher rates of chronic disease, the sector will likely witness even more demand ahead. This corner of the healthcare space has posted solid earnings on good fundamentals, resulting in soaring stock prices.

Robust earnings from some of the companies in the sector such as, Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), Amgen, Inc. (NASDAQ:AMGN) and Merck & Co., Inc. (NYSE:MRK) as well as a bullish outlook on drug approval from the likes of Gilead Sciences, Inc. (NASDAQ:GILD) pushed the sector into a rally (read: 4 Ways to Play the Bullish Trend in Healthcare with ETFs).

Further, with ‘taper hold’ in the U.S. and cheap dollars available around, investors are aggressively picking high-flying sectors like healthcare, technology and consumer discretionary in order to reap as much capital appreciation as they can. This was another reason behind the exciting run of biotech equities.

Affordable Care Act or Obamacare was debated during the recent ‘government shutdown’ leading to a slight pullback in most of the biotech funds in early October. Now with the economy partially averting the shutdown, the sector seems to be back on track once more.

If these were not enough, within the Zacks Industry classification, the rank of the concerned MED-BIOMED/GENE industry is currently #81. The rank is in the top 1/3 of all 260 plus industries ranked, highlighting the group’s near-term Positive outlook.

How to Play?

Investors looking to gain exposure to this uptrend may want to take a look at the following ETFs, as these offer concentrated exposure to biotechnology companies. The biotech ETFs mentioned below could be worthwhile as all these have a Zacks ETF Rank #1 (Strong Buy). The gains out of these funds were double the return offered by the broader market fund SPDR S&P 500 (NYSEARCA:SPY) in the same time frame.

iShares Nasdaq Biotechnology ETF (NASDAQ:IBB)

This fund provides exposure to 119 companies by tracking the Nasdaq Biotechnology Index. With AUM of more than $4.00 billion and average daily volume of about 700,000 shares a day, this is by far one of the largest and the most popular ETFs in the biotech space. The ETF charges a reasonable 48 bps in annual fees.

The product has concentration in the top 10 holdings which account for as much as about 60% of the total. Top three holdings Biogen (BIIB), GILD and CELG make up for about one-fourth share of the fund. Growth stocks are once again a big part of the portfolio with 78% of the assets while large cap calls for 60% exposure.

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