FBT: An Equal Weight Way To Play Biotech (NYSEARCA:FBT)

The biotechnology sector has been a hotbed of innovation and progress, with companies making groundbreaking strides in areas like gene therapy, cancer treatments, and regenerative medicine. This progress, coupled with promising financial returns, has made the sector an attractive investment option. Unfortunately, the momentum just hasn’t been there. Most biotech stocks peaked in 2021 and are still way below those levels.

Potential catch-up trade against everything else that’s done well? Possibly. If you are of that mindset, the First Trust NYSE Arca Biotechnology Index Fund ETF (NYSEARCA:FBT) is worth a look. FBT is an exchange-traded fund that aims to replicate the price and yield performance of the NYSE® Arca® Biotechnology Index before the fund’s fees and expenses. This index measures the performance of 30 leading biotechnology companies.

The FBT operates on an equal dollar-weighted basis. This means it invests an equal amount of money in each company, regardless of the company’s size. The fund is reconstituted and rebalanced quarterly, allowing it to respond to changes in the sector dynamically.

Detailed Look at FBT’s Holdings

Top holdings include

• Natera, Inc. (NTRA): a pioneering diagnostics company that specializes in the development and commercialization of cell-free DNA (cfDNA) testing, offering advanced genetic screening and diagnostics for oncology, women’s health, and organ health to facilitate early detection and informed treatment decisions.
• Bruker Corporation (BRKR): a global manufacturer and distributor of high-performance scientific instruments and analytical and diagnostic solutions, aimed at exploring new developments in life science research, industrial applications, and clinical diagnostics.
• Halozyme Therapeutics, Inc. (HALO): a biotechnology company focused on developing and commercializing novel recombinant human enzymes to enhance the delivery and absorption of other drugs, with a commitment to improving patient experiences and outcomes through innovative and disruptive solutions.
• Mettler-Toledo International Inc. (MTD): a leading global supplier of precision instruments and services, specializing in laboratory equipment, industrial weighing solutions, and process analytics, designed to enhance efficiency and productivity across various industries.
• Waters Corporation (WAT): a global leader in developing innovative analytical science solutions, including liquid chromatography, mass spectrometry, and thermal analysis, for life sciences research, environmental management, food safety, and pharmaceutical development.

Sector Composition and Weightings

The fund’s investments are spread across several sub-industries. The most significant sub-industries are Biotech Therapeutics, which includes companies engaged in the research and development of therapeutic treatments, and Biotech Tools & Diagnostics, comprising companies that produce and provide tools, systems, or processes that enable biotechnology practices.

Peer Comparison

When compared to other similar ETFs, such as the iShares Biotechnology ETF (IBB), FBT holds fewer companies but gives each one an equal weighting. This strategy can potentially offer greater exposure to smaller companies and lower concentration risk. However, it also means that the fund’s performance is more reliant on each holding’s individual performance. When we look at the price ratio of FBT to IBB, it appears there is some recent relative strength starting to take hold.

Pros and Cons of Investing in the Biotech Sector

Investing in the biotech sector, and in FBT specifically, comes with its share of opportunities and risks.

On the positive side, the biotech sector is known for its high growth potential. Given the constant advancements in medical technology and the ever-present need for new treatments and cures, the sector can offer significant returns for investors.

Moreover, by investing in FBT, investors can gain exposure to the biotech sector’s growth potential without having to pick individual stocks. The fund’s equal weighting strategy also offers a level of diversification that can help mitigate individual company risks.

However, the sector is also characterized by high volatility. Drug development is a risky and costly process, and many companies in the sector operate at a loss. Moreover, the sector is heavily regulated, and companies often face significant hurdles in getting their products approved.

Investing in FBT also comes with specific risks. As an index fund, FBT is exposed to the risks of its underlying index. If the companies in the index perform poorly, so too will the fund. Furthermore, because the fund invests equally in all its holdings, it could be more affected by poor performers than a fund that weights its holdings based on market cap or other factors.

Conclusion: Should You Invest in FBT?

The decision to invest in the First Trust NYSE Arca Biotechnology Index Fund ETF hinges on your risk tolerance, investment goals, and belief in the biotech sector’s potential. If you believe in the sector’s growth prospects and can tolerate the associated risks, FBT offers an opportunity to gain exposure to a diversified portfolio of biotech stocks. Just be aware that it’s a volatile sector, and should be sized appropriately.