Two Ways to Play Biotech: FBT’s Return Edge vs. IBB’s Cost Advantage

The First Trust NYSE Arca Biotechnology Index Fund (NYSEMKT:FBT) offers a concentrated, equal-weighted approach to biotechnology, while the iShares Biotechnology ETF (NASDAQ:IBB) provides broad-market exposure with significantly more holdings.

Both funds serve as primary vehicles for investors seeking targeted exposure to the high-growth healthcare and biotechnology sectors. While they share a 100% sector focus on healthcare, their underlying benchmarks lead to distinct differences in risk profiles, asset concentrations, and management costs that may influence which fits better in a long-term investment portfolio. Investors often look to these funds to avoid the high risk of holding individual biotech stocks.

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-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The iShares fund is more affordable with an expense ratio of 0.44%, which is 0.11 percentage points lower than the 0.55% charged by the First Trust fund. This cost difference represents the primary ongoing price gap for investors choosing between these two biotech benchmarks. Over long periods, these basis points can accumulate and impact total returns, particularly in a volatile sector like biotechnology where price swings are common. Lower fees can provide a margin of safety when returns are flat or negative.

Performance & risk comparison

What's inside

First Trust NYSE Arca Biotechnology Index Fund focuses on a concentrated portfolio of 30 positions, primarily in the healthcare sector. Its largest positions include Genmab A/S (ADR) (NASDAQ:GMAB) at 4.76%, Regeneron Pharmaceuticals (NASDAQ:REGN) at 4.00%, and ADMA Biologics (NASDAQ:ADMA) at 3.99%. This concentration means individual company performance significantly impacts the fund more than broader diversified funds. It was launched in 2006.

iShares Biotechnology ETF tracks a much broader index with 243 holdings and maintains a 100% allocation to the healthcare sector. Its largest positions include Gilead Sciences (NASDAQ:GILD) at 8.97%, Amgen (NASDAQ:AMGN) at 8.31%, and Vertex Pharmaceuticals (NASDAQ:VRTX) at 7.73%. Despite having significantly more holdings than its competitor, its top positions still account for substantial weight in the portfolio. It was launched in 2001.

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Which looks like the better buy

When comparing the First Trust NYSE Arca Biotechnology Index Fund (FBT) and the iShares Biotechnology ETF (IBB), investors should consider several key factors. Let's see what they tell us about each fund.

First, we should examine each fund's strategy. FBT has fewer holdings, about 30. It also maintains an equal-weight allocation strategy. IBB, on the other hand, holds far more stocks, around 250, and employs a market-cap weighting strategy.

Two other important factors are historical performance and income potential. Over the last five years, FBT has generated a total return of 71%, equating to a compound annual growth rate (CAGR) of 11.3%. IBB, by contrast, has delivered a total return of 40%, with a 6.9% CAGR. As for income, neither fund delivers significant cash flow. IBB gains a slight edge with a very modest 0.2% dividend yield.

One final factor to weigh is cost. IBB is slightly more affordable with an expense ratio of 0.44%, versus 0.55% for FBT.

In summary, FBT and IBB both hold biotech stocks, however, they vary in strategy, performance, and cost. FBT is best for those investors seeking to maximize returns. IBB may appeal to more cost-conscious investors or those seeking to generate modest income.

Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adma Biologics, Amgen, Genmab A/s, Gilead Sciences, Regeneron Pharmaceuticals, and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.