BBP: A Diversified Biotech ETF – Seeking Alpha

While 2017 has been a pretty good year overall for biotechs, the two largest ETFs in the space - the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) and the SPDR S&P Biotech ETF (NYSEARCA:XBI) - are up 10% and 17%, respectively. It's tough to forget that both of these funds are still about 25% off of their 2015 highs. IBB, which is heavily influenced by the largest biotech names, has been impacted by 50% drops in Gilead (NASDAQ:GILD) and Biogen (NASDAQ:BIIB). XBI has a much more diversified all-cap mix but has experienced similar results.

But not all news coming out of the sector is bad. In fact, one biotech ETF has been downright ripping it since its launch at the end of 2014. The BioShares Biotechnology Products ETF (NASDAQ:BBP), which invests in companies that have at least one primary product that has received FDA approval, is up roughly 42% since its inception at the end of 2014 compared to a loss of 4% for IBB during the same time frame.

IBB Total Return Price data by YCharts

As fund advisor Virtus says on its website, companies that the fund invests in are "typically more established companies with much clinical trial failure risk behind them. They have already successfully completed multiple human clinical trials and have received FDA approval to sell and market a drug." That sounds a lot like IBB, so what's the big differentiator between the two funds? It's BBP's focus on small- and micro-cap biotechs. Nearly 60% of fund assets are dedicated to this space whereas IBB has nearly 40% of the portfolio alone invested in the big five of Regeneron (NASDAQ:REGN), Biogen, Celgene (NASDAQ:CELG), Amgen (NASDAQ:AMGN) and Gilead.

So what did BBP have going for it that IBB didn't over the past year or so? I think it's a combination of portfolio construction and M&A.

BBP has a portfolio that has performed almost as well as can be expected, especially in 2017. Take a look at this chart with the year-to-date performance of the fund's biggest components.

That's exactly what you want to see out of your ETFs - the largest holdings performing the best. Part of that is due to the fact that the fund is equal-weighted and rebalanced semiannually (the last rebalance was done on December 15th). Still, that's a lot of companies whose stocks have risen by 20% or more.

Among the top 10 holdings, all have posted double-digit gains with seven components delivering 25%+ gains.

The other advantage the fund has is that a number of its holdings are in the sweet spot of being developed enough to generate meaningful revenue from their approved product line, yet, being small enough that they can be potential takeover targets. We've seen that within the fund multiple times recently. Relypsa (NASDAQ:RLYP) had a top holding when it got bought out by Galenica (OTC:GNHAY). Not an M&A deal, but the fund's stake in Progenics (NASDAQ:PGNX) spiked when its partnership with Valeant (NYSE:VRX) was announced. Current holdings such as Exelixis (NASDAQ:EXEL) and Acadia (NASDAQ:ACAD) have been rumored as potential takeover targets for a while, so further action could be in store for the fund in the near future as well.

Conclusion

Equal weighting the mature biotech players has been a strategy that's paid off for investors in the last year. The relatively limited exposure to the likes of Celgene and Gilead, which are still nearly 50% off of recent highs, has made the fund more attractive than its more well-known counterpart.

This fund will underperform when the mega-cap biotech names begin to rally again, but over the long term, this ETF should hold up well to IBB, given its more diversified portfolio.

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BBP: A Diversified Biotech ETF - Seeking Alpha