Fidelity Biotech Portfolio (FBIOX) Is Beginning to Show Benefits of Active Management

Biotech ETFs have outperformed the S&P last year despite recent weakness but the IBB is barely keeping pace recently. During the bubblicious momentum days of 2015 when biotech was on a tear major biotech ETFs outperformed mutual funds and all were comparable. After two severe corrections in 2016 and early 2017 the Fidelity Select Biotechnology Fund (FBIOX) up 28% over one year vs 19% for the IBB.

The SPDR S&P Biotech ETF (XBI) remains the leader up 40% over 12 months and a favored play for traders despite the volatility. The XBI is a modified equally weighted index and includes many well known mid-cap stocks with momentum that are likely to move up in a sector rally.The stock holdings of the XBI tends to be re-balanced often maybe as high as 60% depending on algorithms and news. We would expect active management to do better now that the biotech sector depends more on stock picking, for example, M&A plays.

Here is the performance over a 12 month period these four biotech ETFs compare to FBIOX:

For our portfolios, we have favored FBIOX and XBI for a core investment providing a balance of large and small cap stocks. The advantage for ETFs is that trades can be executed during the trading day to catch volatile moves up or down. For example, we recommended the IBB at $250 after the BREXIT sell-off when it looked like a reversal was hit during the day in late June. It is interesting to note that over five years, especially during 2015, the ETFs outperformed and it is only recently that the FBIOX up 19.9% annualized return over 5 years has closed the gap with the IBB.