Is SPDR S&P Biotech ETF (XBI) a Strong ETF Right Now?

Making its debut on 01/31/2006, smart beta exchange traded fund SPDR S&P Biotech ETF XBI provides investors broad exposure to the Health Care ETFs category of the market.

What Are Smart Beta ETFs?

For a long time now, the ETF industry has been flooded with products based on market capitalization weighted indexes, which are designed to represent the broader market or a particular market segment.

Market cap weighted indexes offer a low-cost, convenient, and transparent way of replicating market returns, and are a good option for investors who believe in market efficiency.

However, some investors believe in the possibility of beating the market through exceptional stock selection, and choose a different type of fund that tracks non-cap weighted strategies: smart beta.

This kind of index follows this same mindset, as it attempts to pick stocks that have better chances of risk-return performance; non-cap weighted strategies base selection on certain fundamental characteristics, or a mix of such characteristics.

Even though this space provides many choices to investors--think one of the simplest methodologies like equal-weighting and more complicated ones like fundamental and volatility/momentum based weighting--not all have been able to deliver first-rate results.

Fund Sponsor & Index

The fund is managed by State Street Global Advisors. XBI has been able to amass assets over $6.27 billion, making it one of the largest ETFs in the Health Care ETFs. Before fees and expenses, this particular fund seeks to match the performance of the S&P Biotechnology Select Industry Index.

The S&P Biotechnology Select Industry Index represents the biotechnology sub-industry portion of the S&P Total Markets Index. The S&P TMI tracks all the U.S. common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Small Cap exchanges. The Biotech Index is a modified equal weight index.

Cost & Other Expenses

When considering an ETF's total return, expense ratios are an important factor. And, cheaper funds can significantly outperform their more expensive cousins in the long term if all other factors remain equal.

Annual operating expenses for XBI are 0.35%, which makes it one of the least expensive products in the space.

It's 12-month trailing dividend yield comes in at 0.02%.

Sector Exposure and Top Holdings

While ETFs offer diversified exposure, which minimizes single stock risk, a deep look into a fund's holdings is a valuable exercise. And, most ETFs are very transparent products that disclose their holdings on a daily basis.

This ETF has heaviest allocation in the Healthcare sector - about 100% of the portfolio.

Looking at individual holdings, Moderna Inc MRNA accounts for about 1.11% of total assets, followed by Exelixis Inc EXEL and Exact Sciences Corp EXAS.

The top 10 holdings account for about 10.77% of total assets under management.

Performance and Risk

Year-to-date, the SPDR S&P Biotech ETF has lost about -6.20% so far, and is up roughly 1.82% over the last 12 months (as of 04/23/2024). XBI has traded between $64.12 and $102.89 in this past 52-week period.

The ETF has a beta of 0.92 and standard deviation of 35.24% for the trailing three-year period, making it a high risk choice in the space. With about 140 holdings, it effectively diversifies company-specific risk.

Alternatives

SPDR S&P Biotech ETF is an excellent option for investors seeking to outperform the Health Care ETFs segment of the market. There are other ETFs in the space which investors could consider as well.

First Trust NYSE Arca Biotechnology ETF FBT tracks NYSE Arca Biotechnology Index and the iShares Biotechnology ETF IBB tracks Nasdaq Biotechnology Index. First Trust NYSE Arca Biotechnology ETF has $1.09 billion in assets, iShares Biotechnology ETF has $6.98 billion. FBT has an expense ratio of 0.56% and IBB charges 0.45%.

Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Health Care ETFs.

Bottom Line

To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.

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