Including leveraged fare, there are 21 biotechnology exchange traded funds available to investors. That stable is evolving and gaining new constituents, meaning it's imperative investors look under the hood to ensure they're engaged with a product that suits their investment objectives.
As seasoned ETF investors know, indexes chart the course for passively managed funds and simply because two ETFs have “biotechnology” in their titles, that doesn't mean those fund track similar benchmarks. Looked at differently, investors need to know what index their ETF tracks because methodology, equity weights and other factors play pivotal roles in investor outcomes.
With biotech being a popular destination for investors, both professional and retail, there's a wide array of indexes dedicated to the space. However, the Nasdaq Biotechnology Index (NBI) is arguably the standard to which other biotech indexes are held.
NBI debuted in November 1993, just as the first biotechnology revolution was kicking off and has since developed a reputation for stunning performance. In the 2010s, NBI surged a jaw-dropping 370% and its ability to evolve alongside the industry it tracks makes it a favorite of asset allocators and ETF issuers.
Speaking of ETFs...
Today, there are eight globally listed exchange traded products tracking NBI, one of which is the newly minted Invesco Nasdaq Biotechnology ETF (IBBQ).
IBBQ debuted on June 11 and is the latest U.S.-listed ETF to track NBI. It's also the only non-leveraged fund in that group. For biotech investors that want to eschew some of the complexities associated with this industry, the rookie Invesco fund is a practical option owing to NBI's common sense approach.
“The nearly three-decades-old index methodology remains straightforward, transparent, and befitting of a true industry benchmark: companies must be classified as Biotechnology & Pharmaceuticals by ICB (FTSE Russell’s Industry Classification Benchmark); minimum market capitalization of $200MM; average daily trading volume of at least 100,000 shares; and Nasdaq-listed,” according to Nasdaq Investment Intelligence.
NBI is a cap-weighted index, but there are avenues for ensuring a small number of stocks don't entirely dominate tracking funds like IBBQ. For example, the benchmark's top five components are capped at weights of 8% and none of the other holdings can exceed weights of 4% when the index rebalances. As things stand today, only Amgen (AMGN) at 7.63% has an allocation of more than 7% in IBBQ.
It's also worth noting IBBQ is home to 274 stocks, which is reflective of not only NBI's roster, but the fact that smaller stocks are meaningful parts of the broader biotech investment thesis. In fact, more than half of NBI's components had market values less than $1 billion when IBBQ came to market.
“In terms of market capitalization for the overall group, the average was $5.7Bn (as of last month), while the weighted average was $43.9Bn,” notes Nasdaq. “The median was only $1.1Bn, however. This is reflective of the substantial representation of smaller stocks in the index, with 220 components under $5Bn of market cap comprising 21% of the index weight.”
IBBQ Setting Itself Apart
Like any new ETF, IBBQ is entering a hyper-competitive industry at large and specific to this fund, it's entering an already crowded field of biotech ETFs. And like any rookie ETF, having some avenues to set itself apart from rivals would be helpful to the Invesco fund.
IBBQ has those. Not only does IBBQ offer investors exposure to NBI – the star of biotech indexes – the ETF has an expense ratio of 0.19% per year, making it the least expensive ETF in this category.
Add to that, there's a fee waiver in place through at least December, meaning that IBBQ is essentially free to own, at least until late this year. Combine all those factors and IBBQ has the ingredients to be a successful new ETF.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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