When the stock market is hitting record highs, it’s important to remember that it’s really a market of stocks rather than a stock market. Not all companies are created equal. Nor are all sectors. Most investors probably just assume that the hot and promising field of biotechnology would be a great performer when the major stock indexes are challenging all-time highs. That should be the case, but sometimes things don’t go that way.

What is amazing is that the backdrop for biotech should be incredible. The FDA’s Center for Drug Evaluation and Research’s (CDER) shows that a record-breaking 59 novel drugs were approved in 2018 (58 named) and 19 of them were first-in-class treatments that are either different from those of existing therapies or treat diseases that have had no approved therapies.

Then there is the issue that politics is getting in the way for biotechs. Every level of government wants drug prices to be cheaper, and so does the public. Then again, there is a figure frequently passed around in the media that is costs more than $2 billion on average to bring a drug to market, when considering that less than 12% of targeted drugs actually get approved. That does not mean that any single company has a $2 billion or more cost to bring a drug to market, but the breakdown is fascinating considering that most drug targets will fall short of the $1 billion per year blockbuster drug status.

24/7 Wall St. has looked over some of the biotech sector’s laggards, and we have also looked over the top exchange-traded funds (ETFs) for a breakdown of what they own to show how much they are lagging against the market. This is a time when the Nasdaq Composite and the S&P 500 are literally one or two cheers away from all-time highs.

The $74 billion or so acquisition of Celgene Corp. (NASDAQ: CELG) by Bristol-Myers Squibb (NYSE: BMY) should have created a lot of excitement around biotech for 2019. The deal terms were 1 Bristol-Myers share and $50 in cash for each Celgene share. Unfortunately, the biotech sector has matured into one where there are several dominant players and a whole slew of up-and-coming companies with potential blockbuster drugs that are new to the market or should be coming to market soon. And despite Celgene already having received shareholder approval, its approval announcement indicated that the transaction is not expected to close until sometime in the third quarter of 2019. Bristol-Myers shares recently were down about 30% from their 52-week high, and despite a post-deal recovery rally taking shares up to almost $54, its shares were last seen at $45.00, which is still down over 12% year to date.

This might be a time when it would seem easy to point the finger at Biogen Inc. (NASDAQ: BIIB) after the biotech giant met earnings expectations, but the early gains turned into losses as the cloud of its failed Alzheimer’s drug continues to hang over the company. After opening up almost 1% higher, Biogen shares were last seen down almost 2% at $225.75. The shares have a 52-week low of $216.12 and a 52-week high of $388.67. The market cap is still up at $44 billion.

Gilead Sciences Inc. (NASDAQ: GILD) is another poster child of the “but you haven’t done anything lately” category of biotech stocks. Gilead’s shares peaked at roughly $120 back in 2015 as the hype of curing hepatitis C started to become reality, but the pool of people to treat is now much smaller and there is more competition. And Gilead’s $12 billion (or so) acquisition of Kite Pharma in 2017 has done literally nothing for the stock. At $62.78 a share, Gilead has a 52-week range of $60.32 to $79.61 and a market cap of $80 billion. Analysts have been down and out when it comes to Gilead, but it has been battered so much that analysts see almost 30% upside based on “value.”

Regeneron Pharmaceuticals Inc. (NASDAQ: REGN) was last seen down almost 8% year to date, but it still has a $38 billion market cap despite selling off by 15% in the past 90 days or so.

Amgen Inc. (NASDAQ: AMGN) is currently the largest biotech of them all, with a $114 billion market capitalization, but its shares were last seen down by 7% year to date. Even though the shares have pulled back by 15% from a 52-week high, analysts by and large are not predicting it will return to its high this year.

Before we get into the key biotech ETFs and how they are broken down, note that there are at least some bright spots among the larger biotechs:

• Alexion Pharmaceuticals Inc. (NASDAQ: ALXN) was last seen up almost 36% year to date, and its market cap is now nearing $30 billion.
• Seattle Genetics Inc. (NASDAQ: SGEN) has pulled back handily in April, but its shares are up about 25%, with an $11.6 billion market cap.
• Ionis Pharmaceuticals Inc. (NASDAQ: IONS) also has pulled back in April, but its shares were last seen up 38%, with just over a $10 billion market cap.
• The new “largest biotech IPO of all-time” player, Moderna Inc. (NASDAQ: MRNA), was last seen up 60%, with an $8.5 billion market cap, despite having pulled back about 15% from a blow-off rally peak earlier in April.
• Sage Therapeutics, Inc. (NASDAQ: SAGE) now has a market cap of $8.3 billion, after its shares were last seen up better than 70% so far in 2019.

Short sellers are often rather aggressive when it comes to biotech and pharmaceutical shares. After all, these stocks have upside and downside potential much greater than those in many traditional sectors. The latest batch of short interest data showed a greater number of shares short in some of the top biotechs and saw large swings in top pharma short interest.

So maybe it’s not all bad news. That said, and just like other sector funds, many ETFs and mutual funds have an obvious dominance by the largest biotech stocks. A screen for the largest biotech ETFs in the ETFdb.com universe of 18 biotech-focused ETFs showed eight of them had assets under $100 million.

The performance of biotech sector ETFs has been mixed because of how each ETF is constructed and how its weightings of the top stocks are handled. Another issue that can affect performance on top of raw weightings is how frequently portfolio managers of each ETF adjust their weightings based on performance and inflows and outflows, and that sometimes is less than perfect math, even in a world dominated by machine trading.

iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) was last seen as the largest pure-play biotech ETF, with almost $7.5 billion in assets. Its shares were last seen up about 10% year to date. The ETFdb site indicated that there are 39 stocks inside the fund, and it tracks the Nasdaq Biotechnology Index. The top 10 holdings account for just over 50% of the entire fund. Here is a breakdown of its top 10 holdings and their weightings in the entire ETF:

• Celgene, 8.40%
• Gilead Sciences, 8.16%
• Amgen, 7.96%
• Biogen, 5.79%
• Vertex Pharmaceuticals, 5.73%
• Illumina, 4.33%
• Alexion Pharmaceuticals, 4.01%
• Regeneron Pharmaceuticals, 3.36%
• Incyte, 2.19%
• Biomarin Pharmaceuticals, 2.08%

SPDR S&P Biotech ETF (NYSEARCA: XBI) tracks the S&P Biotechnology Select Industry Index, and it was last seen up a respectable 21% this year. The ETFdb showed that it has a far more holdings, a total of 121 stocks. That also means that the top 10 holdings have a much smaller weighting in the entire ETF:

• Ligand Pharmaceuticals, 1.89%
• Global Blood Therapeutics, 1.76%
• Celgene, 1.73%
• Sage Therapeutics, 1.72%
• Portola Pharmaceuticals, 1.71%
• Exact Sciences, 1.71%
• Ionis Pharmaceuticals, 1.66%
• Array Biopharma, 1.64%
• Neurocrine Biosciences, 1.63%
• Alnylam Pharmaceuticals, 1.63%

The third largest biotech sector ETF is the First Trust NYSE Arca Biotechnology Index Fund (NYSEARCA: FBT), with more than $2.8 billion in assets. It was last seen up almost 13% this year and is concentrated with 31 holdings. While it seeks to track the NYSE Arca Biotechnology Index, the fund tries to use a dollar-weighted average approach rather than a market-cap weighted approach. Its top 10 holdings were shown as follows:

• Alnylam Pharmaceutical, 3.50%
• Ultragenyx Pharmaceutical, 3.45%
• Agios Pharmaceutical, 3.43%
• Alexion Pharmaceutical, 3.43%
• Acadia Pharmaceuticals, 3.40%
• United Therapeutics, 3.36%
• Vertex Pharmaceuticals, 3.36%
• BioMarin Pharmaceutical, 3.35%
• Ionis Pharmaceuticals, 3.35%
• Alkermes, 3.34%

The Direxion Daily S&P Biotech Bull 3x Shares (LABU) was shown to have $658 million in assets and a year-to-date gain of 58%. Investors just need to know that it has three-times leverage and it seeks to track intraday moves, and it may of course have tracking errors over time, along with price decay if the market/index trades sideways over time.

ARK Genomic Revolution Multi-Sector ETF (ARKG) is the standalone leader of biotech-focused ETFs so far in 2019. It had $422.55 million in assets under management on last look, and it was up a sharp 38% this year. That is hands above the rest in the universe outside of ETFs using leverage. Companies within the fund are focused on extending and enhancing the quality of human (and other) life with a focus on advancements in genomics into their business. The companies have a concentration around exposure in CRISPR, targeted therapeutics, bioinformatics, molecular diagnostics, stem cells, agricultural biology and so on. While it was shown to have 34 positions on last look, the top 10 holdings have a combined weighting of close to 60% of the entire ETF:

• Invitae, 9.43%
• Illumina, 9.41%
• Intellia, 7.25%
• Editas, 7.22%
• Medidata Solutions, 5.82%
• CRISPR Therapeutics, 5.14%
• Veracyte, 4.65%
• NanoString Technologies, 4.40%
• Cellectis, 3.91%
• Bluebird Bio, 3.35%

VanEck Vectors Biotech ETF (BBH) had $377.63 million in assets under management and was up 10.77% year to date. Invesco Dynamic Biotechnology & Genome ETF (PBE) was last shown to have $263.3 million in assets under management and was last seen up 12.4% this year.

As you can see, the weightings and compositions of each biotech giant can make a big difference on the performance over any set period. The ETFs actually look better than the largest biotech companies themselves, but the largest biotechs have so far not been carrying their weight. Some investors would think these now represent massive value, while others would worry that they have become value traps.

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