Magazine

Biotech ETFs: It Pays To Shop Around


If you buy and sell an exchange-traded fund, you'll incur more than a trading commission. As with stocks, there's a difference between what a market maker will charge an ETF buyer and what that same dealer will pay a seller. The difference is the "bid-ask spread," and for investors, the smaller the spread, the lower the cost. As a rule, when an ETF sees little trading activity, bid-ask spreads can get wide.

Exchange-traded funds are supposed to be simple: One investment gets you a whole market or a specific sector. You'd think ETFs working the same sector would have more or less the same results. But as biotech ETFs demonstrate, that's not necessarily the case.

Even if the stocks are similar, ETFs can behave differently. In funds weighted by market cap, bigger companies have more sway. In equal-weighted funds, all companies have the same impact. They'll do better when the smaller ones shine.

SPDR S&P Biotech (XBI)

Powershares Dynamic Biotech & Genome Portfolio (PBE)

First Trust Amex Biotechnology (FBT)

iShares Nasdaq Biotechnology (IBB)

Biotech HOLDRs (BBH)

Price ($)

$58.75

$19.45

$25.70

$84.01

$176.95

Year-to-Date Return (%)

27.3

9.9

9.2

8.0

-3.7

Number of Stocks

31

30

20

170

15

How Stocks are Weighted

Equally

Proprietary

Equally

Market cap

Market cap

Top Three Holdings

Myriad Genetics, Cepheid, Pharmion

Imclone Systems, Gilead Sciences, Amgen

Vertex Pharmaceuticals, Biogen, Celgene

Amgen, Gilead Sciences, Celgene

Genentech, Amgen, Gilead Sciences

Top Three as a %

9.7

16.2

18.1

24.1

74.0

Avg. Market Cap ($billions)

9.6

12.5

14.3

2.1

16.7

Comments

This index starts with every biotech in the S&P universe, then trims the list based on market cap and trading volume.

Powershares uses its own "Intellidex," choosing stocks by such criteria as growth rate, risk, and valuation.

With FBT, you know what you're getting: 20 top biotech stocks with very little turnover.

The clear leader in trading volume, iShares contains nearly every biotech-related stock in the NASDAQ.

This portfolio is never reweighted, and its stock holdings rarely change.

All data Oct. 1 Data: ETF sponsors, businessweek.com

By Ben Levisohn


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