Exploring the SPDR S&P Biotech ETF (XBI) for Biotech Industry Exposure

The SPDR S&P Biotech ETF (XBI) is a biotech-only portfolio that tracks the US biotechnology industry. It focuses on smaller companies and avoids big-cap names to minimize reliance on a few giants. XBI uses a modified cap-weighted index to track the performance of the S&P Biotech Select Industry Index.

The SPDR S&P Biotech ETF (XBI) is a biotech-only portfolio designed to track the performance of the U.S. biotechnology industry. Unlike many other ETFs that focus on large-cap companies, XBI avoids big-cap names, instead spreading its exposure across a range of smaller and mid-cap biotech firms. This strategy aims to minimize reliance on a few dominant players and instead provide investors with exposure to a broader range of innovative biotech companies.

XBI uses a modified equal-weight design, which means that each company within the fund is given equal weight regardless of its market capitalization. This approach allows the ETF to be more responsive to the performance of smaller and mid-cap companies, which can be more volatile but also offer significant growth potential.

The ETF's top holdings include a mix of early-stage developers and experienced innovators working in drug development, genetic engineering, and other areas of biological research. Some of the key holdings include Alnylam Pharmaceuticals, Insmed Inc., Incyte Corporation, and Halozyme Therapeutics, Inc., among others. These companies represent a diverse range of biotech sectors, from rare disease treatments to drug delivery platforms and cancer therapies.

Investors in XBI should be prepared for a bumpy ride. The ETF's equal-weight design means that it can move quickly in response to positive news, such as successful clinical trial results or regulatory approvals. However, it can also experience significant volatility when capital dries up or investors become defensive. This volatility is a reflection of the inherent risk associated with investing in smaller, more speculative biotech companies.

Despite its volatility, XBI has shown strong performance in recent months, gaining more than 5% over the past month. However, it is important to note that XBI's longer-term performance has been less impressive, with the fund posting a "D" for six-month performance and an "F" for both one- and five-year returns versus peers. Over the past five years, investors in XBI have experienced a total return of -17.4%, while the S&P 500 has more than doubled.

XBI's risk profile is also notable. The fund has a standard deviation well above the ETF median and annualized volatility north of 27%. Turnover runs at 90%, indicating frequent reshuffling and trading frictions. Additionally, XBI's tracking error is high, with double or triple the deviation from typical ETFs over various periods.

Investors should also be aware that XBI provides limited cash flow to offset drawdowns. The fund has a dividend grade of "F" and a negligible trailing twelve-month yield. This means that investors should not expect significant income from the fund.

In summary, the SPDR S&P Biotech ETF (XBI) offers investors targeted exposure to the U.S. biotechnology industry. However, it is important to be aware of the fund's high volatility and risk profile. Investors should carefully consider their risk tolerance and investment objectives before adding XBI to their portfolios.

References:
[1] https://seekingalpha.com/article/4814846-inside-xbi-what-spdr-s-and-p-biotech-etf-offers-investors