XBI vs. FBT: Broad Biotech Exposure or Concentrated Bets?

The State Street SPDR S&P Biotech ETF (NYSEMKT:XBI) provides broad exposure to the biotech industry, while the First Trust NYSE Arca Biotechnology Index Fund (NYSEMKT:FBT) offers a much more concentrated, equal-weighted alternative.

Biotech is a volatile sector often driven by clinical trial results and regulatory approvals. This comparison looks at how these two funds offer exposure to the space. While both focus on the same industry, they utilize different indexing methodologies that significantly impact their volatility and concentration risk.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The SPDR ETF is the more affordable option with a 0.35% expense ratio. The First Trust fund costs 20 more basis points.

Performance & risk comparison

What's inside

The First Trust biotech fund focuses exclusively on healthcare and holds 30 companies. Its largest positions include Halozyme Therapeutics (NASDAQ:HALO) at 4.28%, Corcept Therapeutics (NASDAQ:CORT) at 3.92%, and BeOne Medicines (NASDAQ:ONC) at 3.86%. It seeks to track the NYSE Arca Biotechnology Index. It was launched in 2006.

The SPDR ETF also allocates 100% of its assets to the healthcare sector but spreads them across 155 holdings. Its largest positions include Twist Bioscience (NASDAQ:TWST) at 1.73%, Oruka Therapeutics (NASDAQ:ORKA) at 1.57%, and Apogee Therapeutics (NASDAQ:APGE) at 1.52%. The fund tracks the S&P Biotechnology Select Industry Index. It was launched in 2006.

For more guidance on ETF investing, check out the full guide at this link.

Which looks like the better buy?

My big three checkboxes when it comes to investing in ETFs are cost (read: expense ratios), assets under management, and diversification/concentration risk. I'm very Goldilocks-like in that way; few ETFs will completely satisfy my requirements, and my whims can change at any moment. But the short version is: lower cost is better; I lean toward larger ETFs; and I typically prefer funds that hold larger baskets of stocks, with position sizes on the conservative side (once we get into double-digit weightings, I'm not thrilled personally).

So FBT is a bit on the back foot here. It's significantly more expensive than XBI (its expense ratio is 20 basis points higher). That may not seem like a lot, but holding this fund over the long term, it would affect your returns. Its assets under management are less than a third of XBI's. AUM is important because it often influences average trading volume; smaller funds typically have lower liquidity, and that bears out here. FBT is much more diversified and has a better five-year return, but I would simply prefer to own XBI because it costs less, and if/when I decide to sell, I'd feel more confident about its liquidity.

Erin Kennedy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BeOne Medicines, Corcept Therapeutics, and Twist Bioscience. The Motley Fool recommends SPDR S&P Biotech ETF. The Motley Fool has a disclosure policy.