The SPDR S&P Biotech ETF (NYSEARCA: XBI) managed by State Street Global Advisors focuses the majority of its holdings in the biotechnology sector. XBI fund managers aim to provide investors a similar total return to that of the S&P Biotechnology Select Industry Index, which is a subindustry portion of the S&P Total Market Index. The benchmark used for XBI tracks the performance of large U.S. company stocks for businesses operating in the field of biotechnology.
As one of the most unique sectors in the market, biotechnology has long been a place where investors seek out high-growth opportunities. Biotechnology companies are those that work to improve the quality of life through research and development in the field of medicine, food and fuel. Companies within this sector and held within XBI are predominately focused on drug development under the umbrella of the medical industry, with major players including Radius Health, Inc. (RDUS), ZIOPHARM Oncology Inc. (ZIOP), Novavax, Inc. (NVAX) and BioCryst Pharmaceuticals, Inc. (BCRX).
Fund managers of XBI utilize a sampling approach to disperse fund assets, and a substantial portion of assets, at least 80%, are invested in the biotech companies listed on the fund’s target benchmark. XBI uses an equal weighting strategy among the 120 biotech company stock holdings found within the fund, as of June 30, 2018.
XBI uses a passive management investment philosophy implemented by its fund managers at State Street Global Advisors. As with other SPDR funds, XBI has a notably low turnover ratio, which helps in keeping total expenses passed on to investors relatively low.
On average, exchange-traded funds (ETFs) in the biotech market have expense ratios ranging from 0.48 to 0.95%. XBI falls below the sector average with a gross expense ratio of 0.35% due to low turnover and passive management, making the ETF more attractive to investors than comparable biotech-focused funds.
Like other ETFs, XBI can be bought and sold on the secondary market, with or without the assistance of a broker. Trading fees and commissions vary depending on the trading platform used.
Suitability and Recommendations
While all investments in the stock market present risk for investors, ETFs with a narrow focus in a single sector are more volatile than more diversified funds. Because XBI only invests in 120 U.S. company stocks, all within the biotech industry, the fund carries more risk for investors and has the potential to fluctuate a great deal. Specific to the biotech industry, companies operating in the sector are high risk due to the increasing costs of research and development, failed clinical trials and the constant potential for losing out to competing biotech firms.
Fund managers at XBI use a sampling approach to select the companies held within the fund, based on the target index. This selection method reduces some of the risk to investors, as does the fund managers’ stance on equal weighting. However, the volatility of XBI can be seen in its risk metrics with a three-year beta of 1.82 versus the Russell 2000 Growth index, a three-year alpha of -11.92 and a Shape ratio of 0.63.
XBI is not suitable for all investors but can be an appropriate holding for those interested in long-term growth. The biotech companies held within the fund leave an investor open to exposure to the market in a highly uncertain sector. When the costs of research and development do not lead to a profitable return by way of a successful new drug, biotech companies have the potential to lose out on an enormous amount of future revenue. However, the biotech sector has proven to be lucrative for investors holding diversified equity positions such as the ones included in the SPDR S&P Biotech ETF.