Four biotechnology-focused ETFs were among the top-10-performing
ETFs in the first half of 2012, as the research-driven
entrepreneurial slice of the health care industry outperformed the
rest of a sector that many have been betting would shine brightly
The demographic backdrop of aging populations around the
developed world, plus the prospect of "Obamacare" delivering upward
of 30 million new patients, has helped fuel health care equities.
Add to that the mergers and acquisitions potential that many
successful biotech companies present as their latest cures catch
the attention of "big pharma," and you have the recipe for
The First Trust NYSE Arca Biotechnology fund (NYSEArca:FBT)
outperformed all the other biotechs in the first six months of
2012, rising in value by more than a third, making it the
second-best-performing U.S.-listed ETF behind the construction ETF
"ITB," which we wrote about separately. Since the end of the
quarter, FBT has tacked on more gains, and is now up more than 37
percent for the whole year.
"Biotech is a high-beta play in the health care space," said
Paul Weisbruch, an ETF trader at King of Prussia, Pa.-based Street
"There's a lot of M&A activity going on in biotech," he
added, noting the small hole-in-the-wall labs that come up with
promising pharmaceuticals are huge growth opportunities for big
drug companies looking to replenish their product pipelines.
Look more closely at FBT and another biotech ETF right behind it
that was the third-best performer in the first half, and things get
Both FBT and the SPDR S&P Biotech ETF (NYSEArca:XBI)-which
returned 33.24 percent in the first half-use equal-weighted
Equal-weighted funds invariably allocate more of their
portfolios to smaller companies and that, in turn, means funds with
So, it's no surprise that right now, high-beta funds like FBT
and XBI are flying high. For the record, FBT has a beta of 1.22 and
XBI has a beta of 1.25, according to IndexUniverse ETF Analyst
Dennis Hudachek. That essentially means they are going to move more
than the market.
That, of course, works both ways, so high-beta funds such as FBT
and XBI are likely to fall the hardest when that day comes.
Investors concerned about the hazards of owning high-beta funds
need look no further than the two other biotech funds that made it
onto IndexUniverse's top-performing ETFs list for the first
Those are the Market Vectors Biotech ETF (NYSEArca:BBH), which
jumped almost 30 percent in the first half, and the iShares Nasdaq
Biotechnology Index Fund (NasdaqGM:IBB), which added almost 25
percent to its price. They were No. 6 and No. 10 on the first-half
Both BBH, one of the former HOLDRs that Van Eck turned into ETFs
last year, and IBB are market-cap-weighted funds that tend to hold
larger companies than either FBT or XBI.
IBB's beta is 1.05, which explains in part why it hasn't
returned as much as the two equal-weighted strategies. But both
cap-weighted ETFs have continued marching higher in the early
sessions of the second half, with IBB and BBH now up, year-to-date,
26 percent and 35 percent, respectively.
It follows that because they have relatively low betas, both IBB
and BBH are also likely to have a less abrupt move downward should
the market reverse.
But for now, biotech seems to be marching to the beat of its own
drum, barely affected by whatever ails the eurozone, the broader
U.S. economy and the emerging markets.
The rally will end one day-perhaps in a spectacular bubble-but
that day isn't yet in sight.
Top 10 Performers YTD (Excluding Leveraged and Inverse as well
as 2012 launches)
||YTD Flows ($,M)
||iShares Dow Jones U.S. Home Construction
||First Trust NYSE Arca Biotechnology
||SPDR S&P Biotech
||Market Vectors Egypt
||iShares MSCI Turkey Investable Market
||Market Vectors Biotech
||iShares MSCI Philippines Investable Market
||Market Vectors Vietnam
||SPDR S&P Homebuilders
||iShares NASDAQ Biotechnology
||YTD Flows ($,M)
||Market Vectors Solar Energy
||Global X Gold Explorers
||iPath Dow Jones-UBS Coffee Total Return ETN
||iPath Pure Beta Coffee ETN
||Global X FTSE Argentina 20
||United States Natural Gas
||iPath Pure Beta Cotton ETN
||Market Vectors Coal
||Market Vectors Junior Gold Miners
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