ETF Showdown: A Biotech Battle

The world of biotech. So much profit potential, so much potential for peril at the hands of the FDA and so many takeover targets for big pharma. Indeed this is a sector that is rarely full of dull moments. A prime example of this being Sanofi-Aventis SNY and its drawn-out tryst with Genzyme GENZ that finally saw the French pharma giant get the biotech firm for $20.1 billion. The biotech sector was active on the M&A front last year and expectations are in place for more of the same this year. That has put the spotlight not only likely targets, but the ETFs that offer exposure to said targets. In other words, now is an ideal time for an ETF Showdown, biotech style. Stepping into the ring, we have the iShares Nasdaq Biotechnology Index Fund IBB and the SPDR S&P Biotech ETF XBI, two of the more widely known biotech ETFs. Neither is a slouch. IBB is up over 19% in the past six months while XBI is up 17% over the same time. IBB is also the winner in terms of assets under management at nearly $1.4 billion compared to just under $430 million for XBI. Another nod to IBB for featuring Genzyme among its top-10 holdings. Celgene CELG and Gilead Sciences GILD could figure prominently in biotech M&A as well and those are both IBB top-10 holdings as well. Even with 128 holdings, IBB's bias is toward large-cap names. XBI features just 30 stocks and while it will get you exposure to large-caps like Amgen AMGN, its weights to stocks like that are much smaller than IBB's. As an example, Amgen represents 3.1% of XBI's weight while getting a 7.4% allocation in IBB. XBI gets the expense ratio nod at 0.35% compared to IBB's fees of 0.48%. For active traders, both funds are worth a look, but making a choice is hard. XBI might be the better given a price tag that is substantially lower than IBB's ($62 vs. $95) and XBI has a slighlty better beta though IBB has the better trading range and liquidity that is far superior. We'll split the difference here and say active traders can get more out of IBB. On the other hand, XBI's exposure to fewer big-cap names that would be buyers and to more smaller companies that would be targets and the better expense ratio, make it the better bet for investors with multi-month time horizons.