FBT: This Biotech ETF Is Better Avoided In The Short Term

Keeping in sync with the overall trend of the biotechnology sector in the past 10 weeks, First Trust NYSE Arca Biotechnology Index Fund (NYSEARCA:FBT) first rose from $141 on February 24th (the last time I covered the stock) to $157.8 on 8th April; and then dropped down to $141.93 at the close of trading on 4th May. So, the stock rose by almost 10 percent in the past seven weeks and then again fell by 10 percent in the last three weeks.

FBT is an equal dollar weighted portfolio of only 30 companies that are engaged in the business of biotechnology and life sciences tools & services. However, due to changes in price of individual stocks, the weightage gets changed. As a result of which, FBT management has to reshuffle its portfolio once every quarter. This does create an impact on the price performance of First Trust NYSE Arca Biotechnology Index Fund.

When I last covered First Trust NYSE Arca Biotechnology Index Fund on 24th February, top 40 percent investments were held in ACADIA Pharmaceuticals Inc. (ACAD), Sarepta Therapeutics, Inc. (SRPT), Neurocrine Biosciences, Inc. (NBIX), Exelixis, Inc. (EXEL), Alnylam Pharmaceuticals, Inc. (ALNY), Bio-Techne Corporation (TECH), Ionis Pharmaceuticals, Inc. (IONS), FibroGen, Inc. (FGEN), Vertex Pharmaceuticals Incorporated (VRTX), Alkermes plc (ALKS), and Qiagen N.V. (QGEN).

However, due to price growth of a few and huge price fall of some other stocks, on 31st March, these compositions changed, and FGEN, ALKS, and QGEN were replaced by better performing stocks like BioNTech SE (BNTX) and Seagen Inc. (SGEN). The company reshuffled its portfolio at the end of April, and in order to make it an equal weighted one, had to decrease its investments in VRTX, TECH, SRPT, NBIX, SGEN, BNTX, ALNY, and ACAD.

Within the top 40 percent of its portfolio, these stocks were replaced by Grifols, S.A. (GRFS), Mettler-Toledo International Inc. (MTD), BioMarin Pharmaceutical Inc. (BMRN), Gilead Sciences, Inc. (GILD), QGEN, ALKS, Incyte Corporation (INCY), Biogen Inc. (BIIB), and United Therapeutics Corporation (UTHR). Price movements thus are having considerable impact on FBT’s portfolio. This might be a reason behind the rise and fall of FBT’s market price.

First Trust NYSE Arca Biotechnology Index Fund is a passive biotechnology sector specific exchange traded fund (ETF) which fully replicates the portfolio of NYSE Arca Biotechnology Index (BTKTR). This fund has an expense ratio of 0.55 percent, and has an asset under management (AUM) of $1.38 billion.

As I mentioned in my last article, despite historically performing quite well, First Trust NYSE Arca Biotechnology Index Fund has generated negative returns over the past one year, and was on a downward trend. I expected the price to fall down further and breach the then-52-week low of $138.59. This did happen on multiple occasions, and on May 2nd, this fund recorded a new 52-week low of $134.87. As a good number of biotechnology stocks are yet to overcome the steep fall since last week of August 2021, FBT’s price still bears uncertainty.

Last time I covered this stock, it was slightly overvalued, since the price multiples were quite high that time. However, this is no longer the case. At present, the price multiples are on the lower side. Price/Book of less than 3, and Price/cash flow of 13.7 can be considered as appropriate and close to the category average. Price/Earnings of 19.25 is also around the category average.

However, First Trust NYSE Arca Biotechnology Index Fund doesn’t pay any dividend. So, considering only the price growth, this ETF has not been able to make any impact on the sentiments of short-term investors. Most biotechnology stocks are yet to post positive growth over a period of past 52-weeks. This fund generated negative price growth of 10 percent, 7 percent, 16 percent, and 13 percent over the past one, three, six and twelve months respectively. The YTD return is also at negative 15 percent.

Besides First Trust NYSE Arca Biotechnology Index Fund, I have covered all other major biotechnology ETFs such as iShares Biotechnology ETF (IBB), SPDR S&P Biotech ETF (XBI), ARK Genomic Revolution ETF (ARKG), Direxion Daily S&P Biotech Bear 3x Shares (LABD), Direxion Daily S&P Biotech Bull 3x Shares (LABU), VanEck Biotech ETF (BBH), Invesco Dynamic Biotechnology & Genome ETF (PBE), iShares Genomics Immunology and Healthcare ETF (IDNA), Global X Genomics & Biotechnology ETF (GNOM), ProShares Ultra Nasdaq Biotechnology (BIB), and ProShares UltraShort Nasdaq Biotechnology (BIS). Out of these 12 biotechnology ETFs, only LABD and BIS were able to record positive growth over the past one year. Not surprisingly, both are derivative inverse funds. This implies that the biotechnology sector had an extremely poor past 12 months.

Long term investors, however, will be interested in this ETF with the assumption that the biotechnology sector will deliver supernormal growth at some point of time. Over the long term, the stock was successful in generating good returns. FBT’s price grew by 28.5 percent and 208 percent over the past 5 years and 10 years, respectively. Since its inception over almost 16 years, the price grew by 566 percent, i.e., at a CAGR of 29 percent. Continuing with similar growth over a longer time horizon is very much possible, due to its effective portfolio reshuffling on a quarterly basis, and the potential of the biotechnology sector to post high growth over the long term.

Last time, I also suggested that investors of First Trust NYSE Arca Biotechnology Index Fund hedge this stock with August 19 call or put options. Covered call with $160 call options, and protective put with $110 put options were available. Fortunately, this ETF didn’t touch either of this price. Thus, neither of these two options would have been exercised. Those who sold the $160 August call option thus would have gained $11 from this strategy. On the other hand, investors would have lost only $2 with a protective put strategy on buying $110 August put option.