The healthcare industry, especially its biotechnology corner,
gave an astounding performance last year with the S&P
biotechnology select industry index returning about 70%. The
performance has been exciting so far this year too, as evident
from 15% return (as of January 31, 2014) and there is plenty of
hope that this trend can continue through 2014.
Let's dig a little deeper and take a look at the drivers of the
3 Sector ETFs Surging to Start 2014
The Affordable Care Act - A Major Driver:
The sector remains a major beneficiary of the legislation's The
Affordable Care Act, often known as 'Obamacare'. The act was
aimed at bolstering the number of insured Americans, which in
turn should boost demand for the Pharma and Medicare industry as
a whole (read:
Obamacare Will Be Amazing for These Stocks and
Though the launch of the program had undergone a plethora of
political as well as technological issues, finally things are
looking to be under control. Now some consumers have bought new
health insurance plans, or have signed up for the expanded
Medicare program in order to obtain coverage.
The law also entails the U.S. companies to provide health
insurance coverage to workers or face government penalties
($2,000 per employee). It does not, however, cover employees who
work less than 30 hours per week on average. The law is
applicable for employers with 50 or more full-time workers.
And with the implementation of these services from this year, the
healthcare sector will surely get a massive boost.
Mergers & Acquisitions:
The U.S. biotech sector, of late, has been gaining traction in
terms of merger and acquisition (M&A) activity. Since 2009,
the sector has seen at least 400 M&A deal each year. As per
pile of cash with sector biggies and still-modest
activity are prompting companies to join hands or take over a
Boom in Healthcare in emerging Markets:
The bio-tech industry has found new investment opportunities in
the under-penetrated emerging markets. According to
, growth markets like BRICs are expanding their healthcare
operations, thereby shifting the sector's expenditure from the
private to the public sector. This transition is helping a major
section of the population in accessing cost-intensive
biotechnological treatments easily thus giving a boost the
overall biotech industry (read:
3 Sector ETFs Crushing the Market in 2013
As per BB Biotech, global population is aging faster than the
overall rise in populace which in turn necessitates increased
healthcare utilization and boosts the demand for biotechnology.
In addition, companies are striving hard to come up with
medicinal solutions to the critical diseases like Alzheimer's,
hepatitis C virus, osteoporosis, rheumatoid arthritis, psoriasis,
multiple sclerosis, dyslipidemia, cystic fibrosis, cancer and
Decent Zacks Industry Rank:
To add to these, the sector has received high grade from various
analysts. Within the Zacks Industry classification, the rank of
the concerned MED-BIOMED/GENE industry is currently
. The rank is in the mid 1/3 of all 260 plus industries ranked,
highlighting the group's near-term neutral outlook (read:
About Zacks Industry Rank
How to Play?
Given the optimism and promising growth outlook, investors
seeking to play the booming biotechnology might want to tap the
space in the ETF form. For those investors, we have highlighted
five ETFs that could be worth a look if the trend continues. 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
SPDR S&P 500
) in the same time frame.
iShares Nasdaq Biotechnology ETF
This fund provides exposure to 123 companies by tracking the
Nasdaq Biotechnology Index. With AUM of more than $5.07 billion
and average daily volume of about 850,000 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
The product has concentration in the top 10 holdings which
account for as much as about 55% of the total. Top three holdings
Gilead, Amgen and Biogen make up for more than 20% of the fund
(see more in the
In terms of performance, IBB returned as much as 65% in 2013. The
fund carries a Zacks ETF Rank #1 (Strong Buy) with a 'Medium'
SPDR S&P Biotech ETF
This fund follows the S&P Biotechnology Select Industry
Index. The ETF has managed assets worth $$1.29 billion. In total,
the product holds 71 securities, which are not at all
concentrated on its top 10 holdings as it accounts for about
one-fourth of the fund.
Intercept Pharmaceuticals takes up 6.27% share of the fund. Apart
from that, no single company accounts for more than 2.43% of the
basket. XBI charges investors 35 bps in fees (read:
Intercept Pharma (ICPT) Pushes SPDR Biotech ETF
Ahead of Rivals
Investors have to pay 35 bps in fees and expenses which is much
lower than the average expense ratio of about 45 basis points a
year. XBI gained an impressive 48.3% in 2013.
The product has a Zacks Rank of 1 or 'Strong Buy' rating with a
'High' risk outlook.
First Trust AMEX Biotechnology Index Fund
This ETF tracks the NYSE Arca Biotechnology Index, giving
investors exposure to 20 companies. It is an equal-dollar
weighted index. The fund has amassed an AUM of $1.10 billion
while charging a slightly higher fee of 60 bps per year from
This product calls for high concentration risk with half of the
total occupying the top-10 share. The fund added 50.6% in 2013.
The product has a Zacks ETF Rank of 1with a 'High' risk outlook.
Market Vectors Biotech ETF
This fund looks to track the Market Vectors US Listed Biotech 25
Index, holding 26 securities in the basket. With an AUM of $573.4
million and an average trading volume of nearly 90,000 shares a
day, the fund offers moderate liquidity.
The fund is a cheaper option as it charges a 35 bps fee per year.
The product is largely focused in its top 10 securities with
around 70% of exposure suggesting high level of concentration
Gilead takes the top spot with 14.7% coverage, closely followed
by Amgen and Biogen at 10.87% and 8.67%, respectively. The ETF
added a massive 65% in 2013. The fund carries a Zacks ETF Rank #1
with a 'High' risk outlook (read:
Top Ranked Biotech ETF in Focus: BBH
PowerShares Dynamic Biotechnology & Genome
This ETF follows the Dynamic Biotechnology & Genome
Intellidex Index. The product has a somewhat low volume of about
90,000 shares a day, but a decent level of AUM at about $384
million invested in 30 stocks. Its top-10 holdings accounts for
about 45% of the total. The fund charges 60 bps in fees and
expenses from investors. It is a slightly pricey option.
The fund is tilted toward growth stocks. The product has added an
impressive 62.0% in 2013. The fund has a Zacks ETF Rank #1 with a
'Medium' risk outlook.
In a nutshell, the sector is poised to surge in the near term.
The implementation of Obamacare was largely protested last year
and led to a 16-day long government shutdown. Investors
should note that the Senate has reached a $1.1 trillion spending
deal, though there was no treat for Obamacare in the bill, at
least no resistance was also there in it.
However, investors should note that it is a high growth and high
beta sector and thus the risk quotient should be considered
before investing in the sector.
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MKT VEC-BIOTECH (BBH): ETF Research Reports
FT-AMEX BIOTEC (FBT): ETF Research Reports
ISHARES NDQ BIO (IBB): ETF Research Reports
PWRSH-DYN BIO (PBE): ETF Research Reports
SPDR-SP BIOTECH (XBI): ETF Research Reports
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