Under The Hood: An Unheralded Biotech ETF

Another day, another set of fresh all-time highs for the major biotechnology ETFs. Biotech investors were treated to the same feat in late March, but as health care has continued to be a market-leading sector, faster-moving biotech funds have flourished.

Heading into the start of trading Thursday the Market Vectors Biotech ETF (NYSE:BBH) was leading the way with a year-to-date gain of over 21 percent. The iShares Nasdaq Biotechnology Index Fund (NASDAQ:IBB), the largest biotech ETF by assets, has not been a slouch with a gain of 20.5 percent while the First Trust NYSE Arca Biotechnology Index Fund (NYSE:FBT) has returned 19.7 percent this year.

The SPDR S&P Biotech ETF (NYSE:XBI), an almost equal-weight play on the sector, has jumped 15.2 percent.

All are higher by at least 1.3 percent in midday trading and all are touching new all-time highs. With performances like that combined with the notion that four biotech ETFs is probably enough, it is easy for other funds to get lost in the shuffle.

Such is life for the PowerShares Dynamic Biotechnology & Genome Portfolio (NYSE:PBE), though that does not mean PBE is a bad ETF. Quite the contrary. PBE was up 14.8 percent year-to-date at the start of trading Thursday. Less than months shy of its eighth birthday, PBE also joined the new all-time high club today.

In a crowded field of biotech ETFs, a fund such as PBE that does not reside among the previously mentioned big four needs to standout in some way. PBE does that. For starters, PBE is not dominated by the big four biotech stocks. Those being Amgen (NASDAQ:AMGN), Biogen (NASDAQ:BIIB), Celgene (NASDAQ:CELG) and Gilead Sciences (NASDAQ:GILD).

Yes, Amgen, Biogen and Gilead combine for 16.8 percent of PBE's, but Celgene is not found among the ETF's 30 holdings. By comparison those four stocks combine for roughly 30 percent of IBB's weight.

Overall, large-caps account for just 22.7 percent of PBE's weight. The fund stands out in comparison to some of its larger rivals by allocating about 42 percent of its weight to small-cap biotech names. The higher exposure to small-caps, particularly in a sector known for being home to an array of volatile small-cap names, might imply PBE is noticeably more volatile than its larger rivals.

Actually, that is not the case. On a year-to-date basis, PBE has only been slightly more volatile than IBB. PBE has also been noticeably less volatile than FBT and 350 basis points less volatile than XBI, according to ETF Replay data.

PBE does have a couple of cosmetic problems. First, its annual expense ratio of 0.63 percent is higher than what investors will find with any of the four other ETFs mentioned here. Second, has average daily volume of less than 12,500 shares per day.

To the second point, at least PBE does have $147.4 million in assets under management, which should be enough to keep the ETF-assets-under-management fanatics interested despite the fund's slack volume. More importantly than AUM is that despite PBE's low volume, the ETF rarely trades at significant discounts or premiums to its net asset value.

For example, in the first quarter, the midpoint of PBE's bid/ask spread was only 50 to 99 basis points below its NAV one time. In all of 2012, the ETF saw the midpoint of its bid/ask drift 50 to 99 basis points above its NAV just one time, according to PowerShares data, implying PBE is indeed sufficiently liquid.

PBE's exposure to small-caps, which could benefit from increased FDA approvals or mergers and activity, could make the ETF an interesting complement to a larger position in a fund such as IBB or XBI. Additionally, risk-tolerant investors that currently lack biotech exposure may want to consider PBE as well.

For more on health care ETFs, click here.

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