Thursday, March 5, 2015

New-to-Market: BBC

New-to-Market - This blog series highlights ETFs that have recently gone public and reflect those strategies currently most in demand by investors.  While ETFs are not eligible for ETFG Risk Ratings until traded for 3 months and ETFG Reward Ratings until traded for 12 months, our goal is to highlight the most cutting-edge investment strategies that have recently embraced the ETF structure – we hope you enjoy this special series of posts.

Congratulations to the team at BioShares who rang the opening bell at the NASDAQ MarketSite yesterday morning and the timing couldn’t have been more appropriate as the biotech sector has already significantly outperformed the broader market in 2015.  The largest biotech fund, the iShares Nasdaq Biotechnology ETF (IBB), is up over 12% in 2015 compared to 1.92% for the S&P 500 as the potential for strong earnings growth and M&A activity offer a counterbalance to the gloomy analyst forecasts that dominated the headlines during earning season.  Given that strong price appreciation, investors looking for a fund that can offer exposure to those biotech stocks that may have been overlooked in the rush to buy names like Celgene or Biogen might want to consider the BioShares Biotechnology Clinical Trials Fund (BBC).

BBC’s unique benchmark construction process and focus on companies in the clinical development phase also helps to eliminate another common issue within the biotech ETF arena, large cross holdings.  Despite the 71 biotech IPOs in 2014, the relatively low number of publicly traded biotech stocks and large inflows into biotech funds over the last several years has led to either large concentrations in top holdings (IBB has nearly 55% in its top ten positions) or large cross holdings between funds that increases the likelihood that the rejection of one or two potential drugs by the FDA could wreak havoc across the entire sector. The LifeSci Biotechnology Clinical Trials Index is equally-weighted with currently over 68 constituents and lives up to its promise of offering exposure to companies beyond what the traditional indices can offer.  Besides having no position in Biogen (BIIB) that currently constitutes almost 10% of IBB, the 68 holdings in the benchmark only make up slightly more than 14% of the assets at their larger iShares rival.

The chief complaints against BBC lie in the nature of the benchmark; the unique construction methodology and thorough review process by a team of industry experts has made the funds expense ratio higher than many of its competitors, .85% compared to .48% for IBB, .6% for FBT and .35% for XBI.  While the performance track record is relatively short given its recent inception, investors willing to pay those higher fees have been well compensated with BBC up over 21.2% since 12/17 compared to 12.1% for IBB, 6.16% for the broader Healthcare Select Sector SPDR and 4.25% for the S&P 500.

One of the biggest winners for the fund has been Orexigen Therapeutics Inc. (OREX) whose stock has risen over 46% in the last two days as the recent announcement that its anti-obesity drug currently in Stage III clinical testing, Contrave, may have a significant impact on reducing the likelihood of cardiovascular problems in severely overweight patients.  While the study isn’t expected to be completed until 2017, the clamor for OREX and the multiple upgrades by analyst’s covering the stock shows the impact of the funds’ equally weighted allocation system as well as the role BBC could play as part of a larger healthcare position.

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This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.

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