Quick Investor Guide To Biotech ETFs [iShares NASDAQ Biotechnology Index (ETF), SPDR S&P Biotech (ETF)]

biotechMergers and acquisitions (M&As) continue to play a major role in the biotech sector and are not showing any signs of slowing down. Biotech companies have always attracted a lot of interest especially from their pharma counterparts who are looking to boost their pipelines. The sector has seen several M&As, collaborations and licensing activities over the last couple of years, the most recent being Roche’s decision to acquire InterMune.

Many pharma companies are focusing on in-licensing mid-to-late stage pipeline candidates that look promising, instead of developing a product from scratch, which involves a lot of funds and time.

Small biotech companies are open to licensing activities and collaborations. Most of these companies find it challenging to raise cash, thereby making it difficult for them to survive and continue with the development of promising pipeline candidates. Therefore, it makes sense for them to seek deals with pharma companies that are sitting on huge piles of cash.

Biotech stocks that have attractive pipeline candidates or technology that can be used for the development of novel therapeutics are much in demand. Therapeutic areas which could see a lot of licensing activity include oncology, central nervous system disorders, diabetes and immunology/inflammation. The hepatitis C virus market is also attracting a lot of attention.

Immuno-oncology is another area that has been in the limelight especially after a good showing at the annual meeting of the American Society of Clinical Oncology (ASCO). Immuno-oncology therapies have the potential to change the treatment paradigm for cancer — they basically use the natural capability of the patient’s own immune system to fight the cancer. (Read: BioShares Plans two innovative Biotech ETFs)

Quite a few companies are also entering into deals for the development of biosimilars, generic versions of biologics. Companies like Amgen and Biogen are all targeting the highly lucrative biosimilars market.

Highlighted below are some biotech ETFs – ETFs present a low-cost and convenient way to get a diversified exposure to the sector.

iShares Nasdaq Biotechnology ETF (IBB)

IBB, launched in Feb 2001 by BlackRock Investments LLC, tracks the Nasdaq Biotechnology Index. The fund mainly covers biotech stocks (78.9%) with pharma accounting for the balance (21.1%). The top 3 holdings include Gilead (9.55%), Celgene (8.79%) and Amgen (8.47%). The total assets of the fund as of Sep 4, 2014 were $5.4 billion representing 121 holdings. The fund’s expense ratio is 0.48% while dividend yield is 0.14%. The trading volume is roughly 1,220,706 shares per day.

SPDR S&P Biotech ETF (XBI)

XBI, launched in Jan 2006 by State Street Global Advisors., tracks the S&P Biotechnology Select Industry Index. The fund covers only biotech stocks. The top 3 holdings include Puma Biotechnology Inc. (5.28%), InterMune Inc. (2.01%) and Exact Sciences Corporation (1.77%). The total assets of the fund as of Sep 3, 2014 were $1.23 billion representing 77 holdings. The fund’s expense ratio is 0.35% while dividend yield is 0.66%. The trading volume is roughly 246,091 shares per day.

First Trust NYSE Arca Biotechnology Index Fund (FBT)

FBT, launched in Jun 2006 by First Trust Advisors, tracks the NYSE Arca Biotechnology Index. The top 3 holdings include InterMune (7.77%), Exact Sciences Corporation (5.9%) and Pharmacyclics, Inc. (5.55%). The total assets of the fund as of Sep 3, 2014 were $1.55 billion representing 20 holdings. The fund’s expense ratio is 0.60% while dividend yield is 0.00%. The trading volume is roughly 114,697 shares per day.

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