Biotech ETFs and Their Underlying Indexes – IBB, XBI and PBE

Biotech is a very crowded investment space with 11 ETFs already in existence. The top two-IBB (iShares NASDAQ Biotechnology ETF) and XBI (SPDR S&P BIOTECH ETF) are issued by BlackRock and StateStree in 2001 and 2006, with $7.86 billion and $3.06 billion AuM respectively. PBE, PowerShares Dynamic Biotechnology & Genome Portfolio was marketed to the market by Invesco PowerShare in 2005, now has obtained $230.56 million assets.

IBB tracks NASDAQ Biotechnology Index, designed to find a set of securities listed on The NASDAQ Stock Market® (NASDAQ®) that are classified as either biotechnology or pharmaceutical according to the Industry Classification Benchmark (ICB). XBI certainly tracks S&P Biotechnology Select Industry Index, derived from GICS biotech sector. Compared to IBB, which is comprised of both biotech and pharmaceutical sectors, XBI is a pure biotech play tilting toward mid and small market sized companies. IBB has another downside as its universe is limited by NASDAQ listed so the fund may miss opportunities in companies traded on the other stock exchanges.

The PowerShares Dynamic Biotechnology & Genome Portfolio ETF, PBE, tracks Dynamic Biotechnology & Genome Intellidex, an equal-weighted index of companies principally engaged in biotechnology and genetic engineering, derived from FactSet Revere Hierarchy system. PBE differs substantially from other biotech ETFs. Only about 1/2 of its holdings overlap those of the TR biotech benchmark. Moreover, far from a plain-vanilla approach, PBE’s underlying index uses a multifactor system (fundamental and technical factors) to select stocks and a tiered equal-weighting system to construct its portfolio. PBE is one of the least liquid biotech ETFs but since Biotech is quite a liquid segment, investors won’t be restricted by its relative wider spread.

Let’s take a look at their performances. Apparently, Biotech sector substantially outperformed all other sectors and benchmark proxied by the S&P 500. Among them, IBB is far ahead.

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