Biotech ETFs Head To Head: XBI Vs. IBB.

The biotech sector has been attracting a lot of investor attention lately. This sector is expected to continue benefiting from increased M&A activities, new drug approvals, better R&D and innovations.

Although the sector took a beating last year owing to drug-price controls and Trump’s plans of tackling the ever-surging drug prices getting highlighted in his latest budget, growing demand for drugs, especially for rare-to-treat diseases, an aging population and increased health care spending should benefit the industry.

U.S. Economy Backdrop

U.S. markets recently suffered a sell-off owing to fears of rising rates. The S&P 500 entered correction territory, as it declined more than 10% from the record high set in January. Strong wage growth and jobs data introduced fears of inflation making a comeback and led investors to bet on aggressive rate hikes.

Consumer prices increased 2.1% year over year in January, unchanged from the previous month but above economists’ forecasts of 1.9%. Moreover, President Donald Trump’s tax reform and spending deal might create further pressure on prices. Hence, the Fed is expected to hike interest rates multiple times this year to tame inflation.

Jerome Powell’s testimony was seen indicative of the possibility of Fed raising rates more than three times in 2018. “In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE [personal consumption expenditures] price inflation to 2% on a sustained basis,” per a Financial Times article, citing a statement by Powell.

As such, when the markets are suffering from the anticipated rate hikes, the non-cyclical nature of biotech stocks might seem appealing to investors. Moreover, encouraging industry trends and positive earnings are poised to benefit the ETFs exposed to the said sector (read: Biotech Crushing the Market: Best ETFs & Stocks YTD).

Let us now discuss two ETFs focused on providing exposure to the sector.

SPDR S&P Biotech (MX:XBI) ETF XBI

This fund seeks to provide exposure to the biotech space and tracks the S&P Biotechnology Select Industry Index. It has AUM of $4.9 billion and charges a fee of 35 basis points a year. It has 108 holdings and bears less concentration risk as less than 19% of the assets are allocated to the top 10 holdings.

The fund’s top three holdings are Bioverativ Inc. (NASDAQ:BIVV) , Array BioPharma Inc. (NASDAQ:ARRY) and Juno Therapeutics Inc. (NASDAQ:JUNO) , with 2.8%, 2.2% and 2.0% allocation, respectively (as of Feb 26, 2018). The fund has returned 31.2% in a year and 5.6% year to date. XBI has a Zacks ETF Rank #2 (Buy), with a High risk outlook.

iShares Nasdaq Biotechnology ETF IBB

This fund seeks to provide exposure to biotech space and tracks the NASDAQ Biotechnology Index. It has AUM of $9.4 billion and charges a fee of 47 basis points a year. It has 196 holdings and bears concentration risk as more than 52% of the assets are allocated to the top 10 holdings.

The fund’s top three holdings Are Gilead Sciences Inc (NASDAQ:GILD) , Amgen Inc (NASDAQ:AMGN) and Celgene Corp (NASDAQ:CELG) , with 8.3%, 8.1% and 7.2% allocation, respectively (as of Feb 26, 2018). The fund has returned 11.1% in a year and 0.7% year to date. IBB has a Zacks ETF Rank #3 (Hold), with a High risk outlook.

Bottom Line

IBB is more popular than XBI, as is evident from its higher AUM. However, XBI may be more appealing to investors owing to its cheaper expense ratio and a better Zacks rank.

At the same time, XBI has significantly outperformed IBB when it comes to performance. XBI has returned almost 5.0% more than IBB so far this year, whereas in a year, it outperformed IBB by more than 20.0%. However, investors should note that XBI is focused on providing exposure to small-cap stocks in the space, while IBB is more inclined toward the large-cap players.

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