The Best Biotechnology Exchange Traded Funds (ETFs) For Biotechnology Investors

SPDR S&P Biotech Exchange Traded Fund (ETF Symbol: XBI)

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SPDR S&P Biotech Exchange Traded Fund (ETF Symbol: XBI)

The SPDR S&P Biotech exchange traded fund (ETF symbol: XBI), which tracks the S&P Biotechnology Select Industry Index, is a modified equal-weighted fund that addresses some of the weaknesses of the Nasdaq Biotechnology Index (ETF symbol: IBB).

While the approximately 133 biotechnology companies stock portfolio isn’t nearly as wide as the Nasdaq Biotechnology Index (ETF symbol: IBB) which has approximately 207 biotechnology companies, the fact that the XBI ETF rebalances its biotech stock portfolio every quarter to give all of its biotechnology stocks equal say in its biotechnology stock portfolio provides for much better stock diversification. It also gives smaller biotechnology companies a larger say in performance; small biotech companies make up two-thirds of XBI’s weight, with another 25% in mid-size biotech companies, and a small 8% in large biotechnology companies.

Like the Nasdaq Biotechnology Index (ETF symbol: IBB), the SPDR S&P Biotech exchange traded fund (ETF symbol: XBI) is a pure biotech play with very little overlap with traditional pharmaceutical drug companies. It’s also cheaper by 11 basis points (a basis point is one one-hundredth of a percentage point).

Because most of its investments are in small biotechnology companies, the SPDR S&P Biotech exchange traded fund (ETF symbol: XBI) can perform well during periods of consolidation. Biotechnology stocks typically drop out of the fund because they fail to meet some sort of size or quality requirement when the fund is reconstituted, but biotechnology stocks also exit the fund when they are bought out by larger biotech companies, creating a nice price increase on their way out of the fund if they are purchased at a premium – a not-uncommon occurrence within this famous biotech exchange traded fund. The downside? A focus on smaller companies can make the SPDR S&P Biotech exchange traded fund (ETF symbol: XBI) a lot more volatile than the even more famous Nasdaq Biotechnology Index (ETF symbol: IBB).