Biotech companies have been riding a wave of Kovid-19 vaccine enthusiasm for months, as the epidemic re-established investor confidence in the value of their research, technology and platforms.
Leaders in the development of coronovirus vaccines
(Ticker: mRNA) and
(NVAX) has seen a tremendous increase in its shares, but the rally is not limited to them. The biggest winners in 2020 included firms with successes in other fields, such as
(TWST), which developed a DNA synthesis platform that made Kovid testing possible, and
(MCRB), which came with a colon-infection therapy.
However investing in biotech is not easy. It is a risky place where companies often do not have income-generating products, and there is no guarantee of government approval for drugs in development. The potential of biotech stocks for external gains often attracts investors, but if high-end efforts fail clinical trials, these companies may also fall abruptly.
Although biotech-focused exchange-traded funds may offer some degree of diversification and reduce risk, their returns are still on the full map. In 2020, more than a dozen biotech ETFs generated returns ranging from 13% to 180%, surpassing the latter’s popular 9.4 billion.
ARK Genomic Revolution
(ARKG). In the first 10 days of 2021 alone, the group’s performance has varied from 3% to 13%, with the ARK Fund again leading the pack.
The large disparity in biotech ETFs’ performance is not surprising, as they have different methods of stock selection and weighting. Although most, except ARK funds, are technically index-tracking — meaning there is no active manager making stock-picking decisions – many are not as diverse as a typical index fund. About two-thirds of them invest in just 25 to 70 stocks, although there are hundreds to choose from.
This is because biotech firms vary widely in size and outlook, and many index providers and fund companies prefer to stay within certain parameters.
Note: data as of January 13; Five-year returns are annual; N / A = Not Applicable
Some prefer early level firms; Others like larger and more stable names. Some invest only in cancer-immunotherapy companies, while others focus on leaders in genomics. Some include foreign companies, others are purely US-oriented. Some consider corporate governance, pending lawsuits or geopolitical events. Not surprisingly, there are often some similarities in the holding or performance of funds.
But biotech is known as a particularly difficult area for stock-picking. Even seemingly unstoppable ARK funds can have a bad year; It lost 2% in 2015, weakening the biotech benchmark as well as the S&P 500 index.
To stretch bets and have a smooth ride, investors may be better off with more diversified funds that cover most of the universe. But not a single fund works. “One thing that is interesting about biotech is that there is not really a plain vanilla fund in space,” says Elizabeth Kashner, research director of the ETF at FactSet. “It’s one of the big holes for at least a decade.”
$ 10.8 billion
iShares Nasdaq Biotechnology
The ETF (IBB) is probably the closest to filling that hole. It is well diversified with around 300 stocks considered biotech or pharmaceuticals by industry classification benchmark. The market cap of the holding ranges from $ 110 million to $ 138 billion and is weighted accordingly, which means large stocks make up the bulk of the portfolio.
As broad-based as the iShares Fund is, however, it only includes stocks listed on the Nasdaq Exchange, as its name suggests, and has some requirements for a minimum market cap and trading volume.
$ 7.4 billion
SPDR S&P Biotech
(XBI) provides an option that holds 173 stocks classified as biotech according to the Global Industry Classification Standard, regardless of their listing according to the exchange and market cap.
There are some points that can give pause.
The fund does not include pharmaceutical companies, as does the iShares Fund, and all of its holdings are assigned equal weight, even though their market value varies widely from $ 73 million to $ 199 billion. This means that the fund’s performance is easily affected by the fluctuations of small companies, which have relatively little impact on the performance of cap-weighted ETFs.
That setup worked well in 2020 — the SPDR ETF achieved 48.2%, almost double the 25.9% of the Eicher Fund.
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While both have benefited from a surge in Modern’s shares, the SPDR fund has grown heavily into other smaller, stronger-performing names such as Immunomedics (which it bought)
(FATE), Twist and
(NVTA) gave an extra lift.
Since it is difficult to identify winners in the biotech space given the uncertainty of drug development, a better strategy is likely to give all players the same size. Even Modern’s success was nearly impossible: before the epidemic in 2019, the stock was once down 34% from its initial public offering price. “I don’t know if a lot of people were moving around in January of last year,” You have this modern stock in your portfolio, “said Kashaner. Over the past decade, the SPDR ETF has defeated the Eicher Fund over a period of one-, three, five, and 10-years. In most individual years it also outpaced its rival.
This is a good option for investors. In fact, barring the ARK genomic revolution, not one of the other biotechnology ETFs was able to beat the 22% annual return of SPDR Biotech in the last five and 10 years.
Write Avi Liu at [email protected]