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Where is Institutional Money Flocking? Biotech - 3 ETFs to Review

 Aug 15, 2008 02:30 PM UTC
Symbol Sentiment Start Return Closed
BIIB n/a
AMGN n/a
DNA n/a
IMCL n/a
FBT n/a
CEPH n/a
OSIP n/a
ILMN n/a
VRTX n/a
GILD n/a
AFFX n/a
AMLN n/a
CELG n/a
BBH n/a
XBI n/a
GLD n/a
GENZ n/a
PDLI n/a

Graphic_arrow1 Via Fund my Mutual Fund:  

One area you can see I've been transitioning into is healthcare. I still don't buy the "technology is a safe haven" thesis but I have to respect that's where money flow is going. Healthcare I can feel a bit more comfortable with because it's a traditional safe haven in times of recession. Not that we are in one, or ever will be in - as the U.S. is the only country on the planet that will avoid recession even though all the problems being caused in the world are due to our excess. We are just that good. ;)

One subsector of healthcare that I always say I fear buying individual stocks is biotechnology - aside from Gilead Sciences (GLD) I can't recall ever owning an individual name in my life due to fear of FDA approval/denial ripping 40% of your capital in milliseconds. With that said, there are a few individual names I have been considering the past month only to watch them to levitate without me. So one approach are ETF's - 3 of which I am looking at and will review in this post - all of which hold the larger type of names I prefer - if you think big cap biotech is risky just imagine small cap biotech. Now before going forward, let me say 1 word of caution is chasing into these ETFs (and the stocks within them) at this point might be "late"; on the other hand we have seen once institutional money makes a decision to run into a sector, the herd mentality takes over and it can run far longer than one ever imagines. But once 'Fast Money' starts pumping a sector so heavily, I begin to get nervous about top ticking a move - however this is the type of sector we'd like to buy on a pullback.

Of the 3 ETFs - First Trust Biotechnology (FBT), SPDR Biotech (XBI), Biotech HOLDRs (BBH) - none really have a ton of individual volume - the latter two average under 300K shares traded daily and the first under 40K shares, so they are somewhat illiquid in fact.

I always like to look at holdings of the ETFs because the construction is so different and I don't like ETFs which are heavily weighted to the top 2-4 holdings. So of these 3 we see that situation with Biotech HOLDRs (BBH) - some might like it, some might not, I fall in the latter camp. Here are the top holdings as of May 31

  1. Genentech (DNA) 38.7%
  2. Gilead Sciences (GILD) 22.8%
  3. Affymetrix (AFFX) 17.4%
  4. Biogen (BIIB) 9.9%
Really there is no need to go further - these 4 names make up 88.8% of the holding. So if you are huge DNA/GILD fan you can essentially buy this ETF and then get a few other biotechs thrown in to offset some of the exposure but with 2 holdings making up 62% of the ETF it really does not strike me as "diversification". On the other hand these 2 stocks have been on a tear and despite a complete blowup in Biogen (BIIB) the ETF is performing well. Reason? DNA has been the subject of a takover bid, and a month ago had a big jump. It will actually be curious to see how the composition of this ETF changes once (if) DNA is acquired. But this doesn't suit our purposes.

Next, we'll look at First Trust Biotechnology's (FBT) top holdings as of June 30
  1. Vertex Pharma (VRTX) 6.8%
  2. Illumina (ILMN) 6.2%
  3. OSI Pharma (OSIP) 6.2%
  4. PDL BioPharma (PDLI) 5.8%
  5. Amgen (AMGN) 5.7%
  6. Cephalon (CEPH) 5.5%
  7. Genentech (DNA) 5.5%
  8. Genzyme (GENZ) 5.0%
  9. Celgene (CELG) 5.0%
  10. Gilead Sciences (GILD) 5.0%
We see a lot more diversification here and the top 10 holdings make up 56.5% of the entire ETF. Interestingly, Illumina (ILMN) - one of our holdings - is the #2 position even though it is not a drug company but a diagnostic / life sciences type of company. All the major players are represented here with Amgen, Gilead, Genetech, and Celgene. Frankly I know nothing about the top holding VRTX but the #3 holding OSIP is one of the names I've been thinking of adding to the fund over the past 3-4 months as the chart has been impressive- but while I've been "thinking" the stock has gained 50%+. So aside from the real lack of volume this name has a lot of positives going for it.

Last, we have SPDR Biotech (XBI) - here are the top holdings as of August 18
  1. Imclone (IMCL) 5.8%
  2. Amgen (AMGN) 4.9%
  3. Genentech (DNA) 4.6%
  4. Amylin Pharma (AMLN) 4.6%
  5. Celgene (CELG) 4.5%
  6. Genzyme (GENZ) 4.2%
  7. Cephalon (CEPH) 3.8%
  8. Gilead Sciences (GILD) 3.6%
  9. Biogen (BIIB) 3.2%
  10. Vertex Pharma (VRTX) 3.1%
Another very diverse group and even less concentration in the top 10, as they make up 42.2% of the ETF. Keep in mind these are fluid vehicles as the top 10 have changed weightings quite a bit from even June 30. I assume Imclone's jump to the top of the weighting has to do with its recent buyout offer. So this is also a solid candidate, and its volume is a bit more attractive to us for ease of exiting or entering the position, or scaling in/out.

For comparative purposes I've posted charts below of the relative performance of the 3 ETFs over 2 time frames: 3 months and 6 months

3 months (click to enlarge)

6 months (click to enlarge)

In the 3 month period, BBH has outperformed with a 25% gain since we had that huge move up in Genentech (DNA) so it's a bit deceiving. The other 2 came in at 16-19% range. In the 6 month period BBH and XBI both came in at around a 25% gain with FBT not far behind at 20%. Again, the action is relatively random as the portfolio weightings outside of BBH are dynamic and we've had takeover action in the group.

I am keeping both FBT and XBI on the radar but due to volume will probably go with XBI once (if) this sector gives us a decent pullback. This will give us some biotech exposure but without individual company risk, and expose us to an area that does not batter us with the daily "financials vs commodities" battleground that is getting weary at this point.

Long Illumina in fund; no personal position

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