Biotech ETFs: How Do FBT and IBB Match Up on Cost, Structure, and Performance?

Comparing First Trust NYSE Arca Biotechnology Index Fund (NYSEMKT:FBT) and iShares Biotechnology ETF (NASDAQ:IBB) reveals a choice between FBT’s highly concentrated portfolio and IBB’s broader, market-cap-weighted industry exposure.

Both funds target the volatile U.S. biotechnology sector, yet they differ significantly in construction and underlying philosophy. While the iShares fund tracks a wide basket of established and emerging firms, the First Trust fund focuses on a tight group of 30 stocks. This structural difference means investors must choose between broad industry representation and a more concentrated strategy that may deviate significantly from the broader sector’s performance. The iShares fund is significantly larger with $9.6 billion in assets under management (AUM), while the First Trust fund manages $2.9 billion in AUM, offering different levels of liquidity for active traders.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The iShares fund is the more affordable entry point for investors, carrying an expense ratio of 0.44% compared to 0.55% for the First Trust fund. This 11-basis-point difference can impact long-term total returns, particularly in the high-growth biotechnology sector.

Performance & risk comparison

What’s inside

The First Trust NYSE Arca Biotechnology Index Fund (NYSEMKT:FBT) offers concentrated exposure to the healthcare sector, which accounts for 100% of its portfolio. It focuses on price movements and income generated by the NYSE Arca Biotechnology Index through a methodology covering just 30 positions. This high degree of concentration can lead to higher idiosyncratic risk compared to broader market benchmarks. Its largest positions include Corcept Therapeutics (NASDAQ:CORT) at 5.84%, NeoGenomics (NASDAQ:NEO) at 4.88%, and Veracyte (NASDAQ:VCYT) at 4.76%. The fund was launched in 2006.

The iShares Biotechnology ETF (NASDAQ:IBB) also focuses entirely on the healthcare sector but provides much broader diversification with 248 holdings. Because it mirrors an index of publicly traded U.S. biotechnology stocks using a market-cap-weighted approach, its performance is more heavily influenced by the industry’s largest and most established players. This diversification may help smooth out some of the volatility inherent in the biotech space. Its largest positions include Vertex Pharmaceuticals (NASDAQ:VRTX) at 7.84%, Amgen (NASDAQ:AMGN) at 7.69%, and Gilead Sciences (NASDAQ:GILD) at 7.11%. This fund was launched in 2001.

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Which looks like the better buy

The First Trust NYSE Arca Biotechnology Index Fund (FBT) and iShares Biotechnology ETF (IBB) are both exchange-traded funds which focus on the biotech sector. While exposure to biotech stocks are certainly not a must for every portfolio, many investors may want some exposure to the sector, given its high growth potential. What’s more, the biotech sector is tailor made for ETFs, as individual biotech stocks are often highly volatile, given their reliance on high-stakes clinical trials that often send stock prices soaring or cratering depending on their outcome. Here’s how these two ETFs stack up in a head-to-head matchup.

First, let’s look at FBT. This fund, founded in 2006, takes an evenhanded approach to its portfolio. No  stock represents more than 6% of its overall holdings. In total, the fund holds positions in around 30 stocks, mostly mid-cap and small-cap stocks. This approach helps the fund spread risk, but still capture upside among stocks that perform well. As for performance, the fund has generated a total return of 168% over the last ten years, with a CAGR of 10.4%. By comparison, the S&P 500 has generated a total return of 316% over the same period, with a CAGR of 15.3%.

Then there’s IBB. The first major difference with IBB is that it has far more holdings than FBT. IBB holds around 100 stocks. Yet, even with more stocks in total, IBB is more top-heavy. Several stocks, including Vertex, Amgen, and Gilead each represent more than 7% of its total holdings. IBB has an expense ratio of 0.44%, which is lower than FBT (which has an expense ratio of 0.55%). However, neither fund’s expense ratio is particularly impressive. As for performance, IBB has generated a total return of 118% over the last 10 years, with a CAGR of 8.1%.

In summary, biotech ETFs aren’t a perfect match for every investment portfolio. Their inherent risk, along with long-term underperformance might make many investors hesitate to include them in an overall portfolio. However, for those seeking exposure to the sector, IBB and FBT offer some choice. Neither fund stands out in terms of cost. However, FBT offers a solid, well-diversified approach that has outperformed IBB over the last decade.

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Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amgen, Corcept Therapeutics, Gilead Sciences, and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.

Biotech ETFs: How Do FBT and IBB Match Up on Cost, Structure, and Performance? was originally published by The Motley Fool