The XBI ETF (SPDR) created in 01/2006 replicates an index based on a selection of 120 specialized stocks in biotechnology. The tracked index is the S&P Biotechnology Select Industry Index. This is a very specialized index from a geographical point of view, composed mainly of US stocks and quoted in USD.
The fee for this ETF is 0.35% and the AUM is approximately $ 3892M. The replication method is direct and there is a dividend distribution policy on a quarterly basis.
Alternative ETFs: SBIO (Invesco UCITS in USD), BTEC (iShares UCITS in USD)
Latest developments
XBI's performance was -15.5% in 2018 after a 43% increase in 2017 year of the rebound after the marked decline of 15.7% in 2016, which followed an overheating and a multiplication by five in 4 years. In 2019, the sector is rebounding and already shows a rise of 10.8%, which illustrates the volatility of this sector, which was heavily penalized by the end-of-year correction of global markets, which particularly affected the technology and technology sectors. multi-strong growth stocks and cyclical stocks in favor of high-yielding defensive stocks.
However, if US biotechnologies do not pay dividends, the multiples are attractive at 18x 2019 earnings, for an average growth rate of 5 years expected around 30% while this sector is very sensitive to the economic cycle and benefits from a rather favorable track record in bear markets.
The declines of the index in a context of high volatility and in the absence of unreasonable multiples, most often represents a stock market opportunity.
Index & components
The Biotech XBI ETF (SPDR) offers interesting intrinsic characteristics because of its less concentrated weighting on the sector stars like Biogen or Amgen.
XBI is a very deep ETF whose first 10 lines represent only 16% of the capitalization. It is thus a very diversified product and not biased by an overrepresentation of the big values, which seems to us fundamental for a growth sector where giants can be born in a few years in the event of a blockbuster. Expected earnings growth over a period of 3-5 years is estimated at 30% for a 2019 PER of 18x, which is slightly above the S & P500.
The biotech sector looks particularly well adapted to an ETF logic that makes it possible to pool risks, rather than focusing on a specific company, which can be very risky. As a whole, if the sector produces many innovative molecules, disappointments can also be the key, with in both cases extreme market reactions because these companies are often valued in relation to only 1 or 2 promising molecules.
The interest of XBI is to be fairly representative of the US Biotech industry and that it is also very attractive in terms of valuation given the expected growth rate over 3-5 years and the long-term potential of the industry. We consider that the price of drugs tends to fall on the old molecules (via generics), but are unlikely to apply on the new ones which would have the effect of penalizing research in a sector where the US is in the forefront . This will probably not happen.
The Biotech sector can be volatile, with very large price variations even if the long-term orientation remains favorable. However, it is also a high-growth sector, with little dependence on the economic cycle, so the sector had held up well during the 2008 financial crisis compared to the S&P500. Volatility must therefore be used during the consolidation phases (as at the end of 2016), while the sector is also often subject to overheating, so it is also necessary to know how to take profits when the multiples become irrational as it was the case in 2015.
The political uncertainties and lack of visibility on the Trump administration's health policy remain a drag on the expansion of the sector.
