Small-Cap Corner: A Forgotten Biotech ETF

Perhaps the most impressive secular story of 2012 has been the performance of the biotechnology sector. Spurred by a spate of new drug approvals, positive trial data and mergers and acquisitions activity, the biotech group has proven immune to U.S. and European macroeconomic headwinds. Beyond individual biotech stocks, ETFs tracking the sector have also impressed in a big way. Year-to-date, the iShares NASDAQ Biotechnology ETF IBB, the largest biotech ETF by assets, is up almost 28 percent. The First Trust NYSE Arca Biotechnology Index Fund FBT has jumped nearly 38 percent while the SPDR S&P Biotechnology ETF XBI trumps both IBB and FBT with a gain of 40.4 percent. All three currently reside at or near all-time highs. Focusing on those ETFs has obviously proven rewarding for investors, but there is another option to consider. The PowerShares S&P SmallCap Health Care Portfolio PSCH has been an unheralded standout among small-cap ETFs this year with a gain of 15.5 percent. PSCH tracks the S&P SmallCap 600 Capped Health Care Index, which according to PowerShares, "is a subset of the S&P SmallCap 600 Index." The S&P SmallCap 600 Index can be accessed via the iShares S&P SmallCap 600 Index Fund IJR. That ETF devotes almost 11.5 percent of its weight to health care names, many of which are found in PSCH. However, the pure play on health care small-caps has proven to be the better option as PSCH has outperformed IJR by 600 basis points year-to-date. PSCH is by no means perfect. Home to $122.5 million in assets under management, the fund 26-month-old ETF is large enough to survive and its 0.29 percent annual expense ratio is reasonable. The knocks on PSCH would include the fact that average daily volume is less than 18,500 shares and options are not available on the fund. Additionally, PSCH's status as a small-cap fund could make it vulnerable should investors decide small-caps, regardless of sector, are not worth the risk. On a related note, it should be noted that PSCH is not 100 percent allocated to small-caps as mid-cap growth stocks account for about 20 percent of the fund's weight. PSCH also is not a pure-play biotech ETF as it also features medical device, diagnostics, and life science supply companies among its holdings. The ETF's top holdings include Questcor Pharmaceuticals QCOR, Salix Pharmaceuticals SLXP, Cubist Pharmaceuticals CBST, Align Technology ALGN and Haemonetics HYSE. That quintet represents approximately 23 percent of PSCH's total weight. In other words, investors looking for perceived safety in the biotech space with names such as Amgen AMGN or Gilead Sciences GILD would do well to avoid PSCH. That said, the PowerShares offering does offer utility for investors looking for small-cap exposure. Additionally, investors holding a more conservative health care ETF such as the Health Care Select Sector SPDR XLV could pair that position with PSCH to bolster access to growth names. For more on biotech ETFs, click here.