The biotech boom peaked in July 2015, and as the industry slowly recovers from its slump one of the biggest biotech ETFs is looking more attractive.
SPDR S&P Biotech ETF (XBI) is trading near 52-week highs, approaching a potential buy point of 72.68 in a flat base. The ETF has moved back above its 50-day moving average in the past couple of weeks, which strengthens its chart.
IBD’s biotech industry group has been in the top 15 of 197 groups for many weeks, reflecting the industry’s comeback. Yet, it is still short on stocks with superior fundamentals that are near proper buy points. Even many of the stocks with high IBD Composite Ratings are low-priced stocks or otherwise lacking. A few are still unprofitable companies.
The SPDR Biotech ETF, though, provides a way to invest in the sector’s broad advance without having to find specific stocks. Buying the index also can provide some buffer against company-specific risks, which can be big in biotechs. Poor clinical trials or a rejected drug application are risks on top of the usual investor worries such as earnings reports.
The fund owns about 90 stocks, including industry heavyweights such as Biogen (BIIB), Gilead Sciences (GILD), Celgene (CELG) and Amgen (AMGN). But some of the largest holdings in terms of portfolio weight are small-cap or midcap companies such as Ionis Pharmaceuticals (IONS) and Exelixis (EXEL). On Tuesday, Exelixis broke out of a base but retreated right back below the 23.59 buy point the next day.
The ETF selects stocks mainly on revenue, but earnings and “market perception” are also considered, according to the prospectus. All stocks are picked from the S&P Total Market Index, a broad domestic gauge, and must have a market capitalization above $500 million and certain liquidity ratio requirements. The average weighted market cap is about $17 billion.
SPDR S&P Biotech rose more than 20% in the first three months of 2017. It has an average annual gain of 13.9% the past three years and 21.3% the past five years.
That compares favorably to iShares Nasdaq Biotechnology (IBB), another widely held ETF. That fund rose about 12% in the first quarter, and the three-year average return is 7.6% and the five-year average return is 19.2%. The iShares biotech ETF is more heavily weighed on the industry giants.
The industry outlook is difficult to measure. Much of it depends on new drugs hitting the market, and there’s been pressure on drugmakers to cut prices on some costly medicines.
“Growth prospects for the sector have been in decline and the drug pricing debate is extremely difficult to handicap,” Jonathan Golub, chief equity strategist at RBC Capital Markets, said of the health care sector in a report last Monday.
The IBD ETF Leaders index shows the performance of a model portfolio of exchange traded funds that are leading the overall market. A computer algorithm selects the ETFs based on relative strength and other objective performance ratings, with periodic adjustments for market trends and conditions. The universe from which the ETFs are selected includes the funds listed below.
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