XBIotech

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Week after week, the S&P 500 ETF SPY tops the search results by financial pros.

Then we have the…Biotech???

In the last year, we could count on one hand the #2 ETF search by financial pros isn’t the Nasdaq 100 QQQ or some other popular ETF.

Never has the biotech ETF jumped into this slot.

As the kids say…that’s a BFD.

The global biotech market was estimated at $1 trillion in 2021. Through 2030 it’s expected to grow at a compound annual growth rate (CAGR) of 13.9% according to a report out of Grand View Research.

Despite the massive growth potential in the coming years, biotech stocks got slammed in 2022, at one point down more than 50%. 

However, with the market bouncing back, and risk appetite increasing, we’ve seen a nice pop over the last month.

Unless you are an expert in the space, picking individual stocks is risky. 

Thankfully, you can gain exposure by buying a basket of biotechs through an ETF. One of the most popular ETFS in the sector is the  SPDR S&P Biotech ETF (XBI). 

And with investors shunning high-growth tech names, there’s a lot of reasons why risk money wants to hide out in biotech.

SPDR S&P Biotech ETF (XBI) is designed to track and return the performance of the S&P Biotechnology Select Industry. It’s a modified equal-weighted index that invests in large, mid, and small-cap biotech stocks.

The average market cap of the companies in XBI is $10.2 billion. Other important stats worth noting are:

• Price-to-earnings ratio of 13.61x
• Price-to-book ratio of 4.01x
• Estimated 3-5 year EPS growth -7.54%
• 135 stocks in the ETF

Below you’ll find the top ten holdings in XBI and their respective weighting:

Global Blood Therapeutics Inc. (GBT) is the ETFs largest position, at 2.52% weighted. 

Pfizer (PFE) recently announced it would buy GBT for $5.4 billion. 

Unlike the heavily skewed S&P 500 or Nasdaq 100, the top ten holdings only make up 14.8% of the ETFs weighting. We believe this is a good thing because of all the volatility in biotechs. One stock’s poor performance won’t wreck the performance of the ETF. 

If you invested $10K in XBI 10 years ago, it would be worth $43,773, quite a nice return. 

Year-to-date, XBI has outperformed the QQQ but lags the performance of the SPY. However, over the last ten years, an investment in XBI would have beat out the SPY but not that of the QQQ. 

Trading XBI

XBI is one of the most actively traded ETFs in the market. On average, 14 million shares trade daily. Options traders can also get a piece of the action, with weekly, monthly, and LEAPS being tradeable.

Investing In XBI

Before you invest in an ETF, it’s essential to know the costs involved. 

The ETF charges an expense ratio of 0.35%. Generally speaking, you should be skeptical about ETFs that charge an expense ratio of 1% or greater.

In addition, XBI pays its investors an annual dividend of $0.21 per share. While its yield isn’t good enough to beat inflation, it’s better than nothing. 

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XBI Not The Only Game In Town

XBI is the most actively traded non-levered biotech ETF, but it’s not the only option investors have who want to gain exposure to the space. For example, there’s Cathy Wood’s ARK Genomic Revolution ETF (ARKG). It’s an actively managed ETF, whose top holdings include Teladoc Health (TDOC), Exact Sciences (EXAS), Pacific Biosciences of California Inc. (PACB), CareDX (CDNA), and Regeneron (REGN). 

There’s also the iShares Biotechnology ETF (IBB).  Its top holdings include Vertex Pharmaceuticals (VRTX), Amgen (AMGN), Gilead Sciences (GILD), Regeneron Pharmaceuticals (REGN), and Moderna (MRNA). 

Our Opinion 10/10

We really like how diversified XBI is. Biotech stocks are extremely volatile, and knowing not one single stock can wreck the fund is assuring. 

Over the last ten years it has posted impressive returns. And with the ETF currently down double-digits in 2022, we believe now is a good time to jump into this ETF.

More importantly, with higher interest rates and risk appetite not completely stricken from the markets, we expect biotech to receive a lot of attention, especially in light of Covid and, more recently, Monkeypox.