The Best Biotech ETF Isn't Always The Biggest

Biotechnology ETFs have leapt out of the gate in 2015 with another strong spurt of momentum that has catapulted them to the top of sector rankings.  The unequivocal asset leader in this category is theiShares NASDAQ Biotechnology ETF (IBB), which has over $8 billion under management. 

IBB has gained more than 12 percent so far this year and continues to shine as an industry-leading benchmark.  This performance, while impressive, is still a far cry from several specialized biotech ETFs with unique index construction methodologies.

The relatively new ALPS Medical Breakthroughs ETF (SBIO) was released on the last day of 2014 and has achieved an impressive return of nearly 18 percent this year.  This ETF focuses on 75 small and mid-cap biotechnology and pharmaceutical companies with a weighted average market cap of $2 billion.  SBIO currently has $17 million in total assets and charges an expense ratio of 0.50 percent.

This ETF is designed for those that are seeking more aggressive or early-stage biotech companies with a smaller footprint than the larger stocks that dominate an index like IBB.  In addition, the inherent diversification in SBIO can be more advantageous than researching and investing in individual companies. 

Another standout in the biotech space has been the SPDR S&P Biotech ETF (XBI), which has gained more than 16 percent this year.  

XBI relies on a modified equal weighted methodology to distribute $2 billion in assets to 88 underlying stocks.  This allows for smaller companies within the index to have a much greater pull on the total performance of the fund than traditional market-cap weighted strategies.  This ETF charges an expense ratio of 0.35 percent annually as well.

XBI still has exposure to top companies such as Gilead Sciences Inc (GILD) and Celgene Corp (CELG).  However, it also beckons niche companies such Foundation Medicine, Inc. (FMI) from all major U.S. exchanges. 

The variances in this menu of ETFs highlight the significance of index construction on overall returns.  Right now, smaller biotechnology companies are a driving force of outperformance, but that may change as conditions evolve.