Top 3 Index Funds for Biotech

Performance Review of IBB, PJP and XBI

A Market Brief !

Steven Kim

"int#it Investin$
www%mint&it%com

Disclaimer This rief is provided as a resource for information and education% The contents ref'ect persona' views and shou'd not e construed as recommendations to an! investor in particu'ar% (ach investor has to conduct due di'i$ence and desi$n an a$enda tai'ored to individua' circumstances%

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A performance review of the top index funds for the iotech industr! paves the wa! for investin$ in one of the most d!namic ranches of the stoc& mar&et% For this purpose, a ro ust and convenient vehic'e for investment 'ies in an exchange traded fund /(TF0% In order to o tain a a'anced view of performance, the window of eva'uation shou'd cover a period in which the mar&et has encountered a oom as we'' as a ust% 1n one hand, a 'on$ish span provides a wea'th of data for a thorou$h surve! of performance% 1n the other hand, the turnout in recent !ears is 'i&e'! to e a etter $uide to the prospects $oin$ forward than the experience of the distant past% 2iven this ac&drop, a window of three !ears seems 'i&e a fittin$ compromise etween the contrastin$ issues of amp'e data versus hi$h re'evance% From a different an$'e, a $raphic disp'a! of the price histor! can provide an intuitive $rasp of the index funds under consideration% The earnest investor has to consider the vo'ati'it! of the vehic'es durin$ the window of eva'uation in tandem with the overa'' pa!off over the entire stretch% Based on the capita' $ains over the course of three !ears, the est index funds in the iotech patch $o ! the tic&er s!m o's of IBB, PJP and XBI% (ach of these vehic'es trounced the chief enchmar& of the stoc& mar&et 3 name'!, .P4 3 ! a hu$e mar$in% 5 Keywords: Biotech, (TF, (xchan$e Traded Funds, Index, Top, Best, Index, Performance, Ris&, Return, .P4, IBB, PJP, XBI 5 5

5 5 5 To o tain a rounded view of performance, an investment vehic'e has to e assessed over a 'on$ish period that inc'udes at 'east one upsur$e and one 'owup of the mar&et% For this purpose, a suita 'e window 'ies in an interva' of three !ears endin$ in Fe ruar! *+,-% This timespan covers the crash of the stoc& mar&et in the autumn of *+,, as we'' as the upswe''s of the ourse efore and after the ustup% In order to pic& the est index fund for a 6est! portfo'io, a asic step is to pinpoint the front7 runners in the fie'd% In si6in$ up the candidates, the &e! criteria inc'ude the return on investment a'on$ with the vo'ati'it! in price% As a ru'e, the fore$oin$ traits are inter'in&ed rather than independent% For instance, an index fund on a $rowth strea& is apt to e more f'i$ht! than a p'oddin$ ri$ that tramps a'on$ at a 'um erin$ pace% In sortin$ out the intertwined traits, a strai$htforward move is to e$in ! cu''in$ the 'eadin$ vehic'es in terms of $rowth% Then the other factors such as ris& and 'i8uidit! can e rou$ht to ear on the appraisa'%

Selection Criteria
.ince the purpose of an investment is to earn a profit, a candidate assets ou$ht to e fruitfu' as we'' as hard!% These $eneric traits app'! to tan$i 'e $oods as we'' as virtua' wares% An examp'e of the former 'ies in commodities or rea' estate, whi'e an instance of the 'atter invo'ves currencies or index funds%

.ince the eve of the mi''ennium, the fie'd of exchan$e traded funds has $rown at an exp'osive rate% A'on$ with the upthrow, a raft of entrants have popped up on'! within the past few !ears% For this reason, the newcomers have 'itt'e to offer ! wa! of trac& records% 1n one hand, a 'ar$e trove of data can serve as the fodder for a comprehensive surve! of the mar&et% 1n the other hand, an investor who insists on an extensive histor! wi'' there ! exc'ude scores of f'ed$'in$ funds% 2iven this ac&$round, the mindfu' p'a!er has to trade off the amount of data a$ainst the num er of candidates% In that case, a trac& record of 3 !ears appears to e a suita 'e compromise etween the opposin$ factors% In pic&in$ the est vehic'es for investment, a second criterion invo'ves the 'i8uidit! of the mar&et% A s'u$$ish niche mar&ed ! 'ow turnover is a turnoff for the nim 'e investor who wants to enter and exit the mar&et in a time'! fashion% As a defensive measure, a turnover of ,+,+++ shares a da! seems 'i&e an apt thresho'd on the 'ow side% A third factor 'ies in the use of 'evera$e, or 'ac& of such% 1n a positive note, a 'evered scheme can turn in an outsi6e $ain when the mar&et is on a ro''% 1n the f'ip side, thou$h, a hi$h 'eve' of $earin$ resu'ts in a crushin$ 'oss durin$ the downstro&e that du'! fo''ows ever! upsur$e% As a practica' matter, the upta&e of 'evera$e opens up a can of worms which is anathema to the $enuine investor ent on ui'din$ up a nest e$$ over the 'on$ hau'% The o$e!s at hand inc'ude o vious threats as we'' as o scure sna$s% To e$in with, a stumper of modest si6e concerns the standard notion of ris&% The use of 'evera$e $ives rise to wi'd swin$s to the upside as we'' as downside% The thrashin$ of prices shows up in a'' time frames, from 'ess than a wee& to more than a decade% The manic f'ai'in$ due to a 'evered position is a headache that the so er investor does not need to put up with% From a 'ar$er stance, thou$h, the vo'ati'it! in price is a minor nuisance compared to the $ross specter of a whoppin$ f'op% 9nfortunate'!, the prospect of utter ruin is i$nored ! the
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mass of participants in the mar&etp'ace% The cava'ier p'a!ers who rush aside the 'etha' threat run the $amut from casua' amateurs to $un$7ho professiona's% To add to their p'i$ht, the victims of a 'owup rare'! mana$e to reco$ni6e the true cause of the mishap even after the fact% In most cases, the stunned sou's wa'& around in a da6e and cha'& up the ust to a wanton act of providence% In rea'it!, thou$h, such a &noc&out is the inevita 'e outcome of a rec&'ess wa$er% In this wa!, the upta&e of 'evera$e is a rash move that ends in tears sooner or 'ater% In some cases, the $earin$ resu'ts in the cutdown of wea'th in s'ow motion% A $ood examp'e invo'ves a communa' fund in which the operators purchase a series of stoc& options in a f'a&! effort to ma$nif! the impact of a rise in price in the tar$et mar&et% In practice, thou$h, the u'& of options expire without !ie'din$ an! &ind of pa!out to the u!ers% "ore $enera''!, the purchase of tur ochar$ed too's is a 'osin$ $ame over the 'on$ hau' for mi''ions of punters% The $rod! outcome is a universa' fate that efa''s a'' manner of p'a!ers in the mar&etp'ace% A common examp'e invo'ves the purchase of ca'' options in order to :ac& up the returns on a stoc& index% .ad'!, thou$h, the p'un$ers in search of 8uic& profits are headed for the poorhouse sooner or 'ater% ;ependin$ on the context, the operator of a communa' fund ma! opt to ta&e up 'evera$e in other wa!s% An examp'e 'ies in a customi6ed 'oan from a commercia' an&, or a standardi6ed contract in the futures mar&et% 1n the downside, thou$h, the 'evered $am it is sure to rin$ $o s of $rief in due course% The threat of a tota' wipeout is far $reater than most peop'e rec&on% To revea' the scope of the pro 'em, we turn to the financia' crisis of *++< a'on$ with its aftershoc&% In the throes of the ca'amit!, ever! ma:or enchmar& of the stoc& mar&et 'ost more than ha'f the va'ue it had reached at its prior pea&% In that case, a modicum of 'evera$e ! a mere factor of * resu'ted in the o 'iteration of the entire principa' from the outset, and then some% In certain fie'ds such as the futures
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mar&et, a ramp7up ! a factor of ,+ is par for the course% "eanwhi'e other domains such as currenc! tradin$ a''ow the $am 'ers to ta&e up 'evera$e ! a factor of =+, or in some cases ,++ or even hi$her% As we have seen, however, even a modest amount of $earin$ is the path to certain doom% From a 'ar$er stance, a $'ut of ris& is the main cause of the end'ess hai' of 'owups in the financia' forum% A fine examp'e invo'ves the swarm of hed$e funds that f'it around the mar&etp'ace% In this portion of the mar&et, even the e'ite outfits 3 name'!, the 'uc&! punters that have mana$ed to s8uirm their wa! into the top tier of heav!wei$hts 3 are fated to 'ow up and die off in droves% "ore precise'!, the $hast'! rate of attrition thins out the ran&s of the hi$h f'!ers at the :aw7droppin$ rate of one7ha'f of their num er ever! coup'e of !ears /#im, *+,,0% 2iven the ha6ards oth 'atant and su t'e, ta&in$ up 'evera$e is an assured wa! to 'ose out over the 'on$ ran$e% For this reason, we wi'' exc'ude an! vehic'e that resorts to $earin$ in a rec&'ess attempt to pump up the returns on investment% In other words, the proper candidates for a sound pro$ram of investment re'! on the honest tac& of trac&in$ the tar$et mar&et in a forthri$ht wa! without u'&in$ up on the steroids of 'evera$e%

Top Index Funds for Biotech

In the wor'd of communa' funds, a venera 'e resource is found in an information provider named "ornin$star% At the >e site maintained ! the mar&et watcher, one feature is a asic 'ist of exchan$e traded funds% The data on the poo's inc'udes a ta''! of performance over the past 3 !ears as we'' as a measure of popu'arit! in terms of the vo'ume of tradin$% As we noted ear'ier, a candidate asset ou$ht to feature a modicum of 'i8uidit! in order to ena 'e the investor to u! and se'' a sta&e in a time'! fashion% For this reason, we wi'' consider on'! funds that sport a tradin$ vo'ume of ,+,+++ shares a da! as a representative fi$ure%

To rin$ up an additiona' fi'ter, an (TF ou$ht to oast a modicum of price histor! in order to support a meanin$fu' ana'!sis of performance% For this purpose, a window of 3 !ears seems 'i&e a fittin$ re8uirement% A standard earer of the stoc& mar&et 'ies in an index of =++ heav!wei$hts compi'ed ! a financia' advisor! named .tandard @ PoorAs Borporation, an outfit which a'so $oes ! the nic&name of S&P% The enchmar& of the i$ fish happens to e the most popu'ar prox! of the stoc& mar&et amon$st the professiona's in the fie'd, e the! active traders or passive researchers% "eanwhi'e he trac&in$ fund for the mar&et index trades under the tic&er s!m o' of SPY% Accordin$ to a recent ta''!, .P4 turned in an avera$e return of ,-%*+C per annum over the course of 3 !ears endin$ in ear'! *+,-% In terms of transaction vo'ume, the index fund is prone to cha'& up rou$h'! ,*, mi''ion shares a da!% 1ur tar$et domain consists of iotech funds that shun an! form of 'evera$e% Amon$ these poo's, the top performance was turned in ! the i.hares Dasda8 Biotechno'o$! fund, which trades in the 9%.% mar&et under the tic&er s!m o' of IBB% The purpose of the vehic'e is to trac& an index focused on iotechno'o$! and pharmaceutica' firms 'isted on the DA.;AE exchan$e% The trac&in$ fund a$$ed a $ain of -,%+<C a !ear on avera$e over the past 3 !ears% "eanwhi'e, the runner7up in the sweepsta&es was the Power.hares ;!namic Pharmaceutica's, which f'ies under the anner of PJP% The d!namo turned in an avera$e return of 3<%,FC per annum over the course of three !ears% Fina''!, the ron6e meda' was sna$$ed ! the .P;R .@P Biotech fund, which sports the ca'' si$n of XBI% The $o7$etter cha'&ed up a $ain of 3F%GGC a !ear on avera$e /"ornin$star, *+,-0% As we have :ust seen here, a numeric ta''! provides a direct and forthri$ht wa! to summari6e the performance of the 'eadin$ candidates% 1n the other hand, a $raphic disp'a! of the price action can provide the shrewd investor with further cues on the texture of the mar&ets%
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Graphic View of erformance

As we noted ear'ier, a window of three !ears endin$ in ear'! *+,- covers an upsur$e of the stoc& mar&et in the wa&e of the 2reat Recession as we'' as a crash of the ourse in the autumn of *+,,% 1n the other hand, a 'on$er window of five !ears offers a roader view of the mar&et% In this wa!, a surve! of the vehic'es durin$ and after the 'atest crash can provide a raft of pointers for the deft investor% The chart e'ow, courtes! of ".D "one! /mone!%msn%com0, spans a period of = !ears endin$ in Fe ruar! *+,-%

In order to mar& out a ase'ine, the 'ue curve in the exhi it renders the course of .P4 over the span of ha'f a decade% The sharp drop around the midd'e of the chart portra!s the crash of the stoc& mar&et in the autumn of *+,,%

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;espite the inevita 'e set ac&s from time to time, the 'eadin$ enchmar& of the mar&et had a ha it of trud$in$ hi$her over time% The oxed num er on the ri$ht side of the $raphic indicates that .P4 rose ! ,F+%3+C over the entire span of five !ears% "eanwhi'e, the $o'den curve on the chart depicts the pro$ress of XBI% The index fund was prone to trai' ehind its riva's durin$ the first few !ears of the appraisa' window% 1n the other hand, the 'ate 'oomer shoo& off the do'drums in *+,* and sna$$ed a $ain of *F*%,<C over the course of ha'f a decade% As a resu't, the vehic'e outpaced .P4 ! a comf! mar$in% The purp'e arc on the chart portra!s the path of IBB% The index fund advanced at a measured pace durin$ the first few !ears% Then it turned in a rousin$ performance, especia''! over the past !ear% The overa'' return over the span of ha'f a decade turned out to e 3-*%-FC% >e reca'' from the previous section that IBB turned in the est performance over the past three !ears% (ven so, the index fund came in second p'ace in the 'on$er der ! 'astin$ ha'f a decade% Turnin$ now to the remainin$ entr!, the oran$e s8ui$$'e on the chart depicts the path of PJP% After a s'ow start in *++G, the 'ive wire turned in an admira 'e performance in su se8uent !ears% For one thin$, PJP suffered on'! a mi'd rea&down durin$ the crash of the stoc& mar&et in autumn *+,,% Then it continued to tramp hi$her in the !ears to fo''ow% As a resu't, the pacesetter sna$$ed an overa'' $ain of 3?F%G*C over the span of ha'f a decade%

!rapup of Biotech "TF #e$iew

In order to pic& out the est assets for investment, an o vious point of departure 'ies in the performance over the past few !ears% A stum 'in$ 'oc&, however, stems from the fact that a 'ot of exchan$e traded funds are re'ative newcomers to the fie'd%

As a resu't, the sap'in$s of this reed do not have much of a trac& record% In that case, an investor who insists on a 'en$th! histor! wi'' end up with a scant! poo' of candidates% For this reason, the wor'd'! investor has to trade off the 'en$th of the trac& record a$ainst the si6e of the candidate poo'% At this ear'! sta$e in the evo'ution of exchan$e traded funds, a reasona 'e compromise etween the opposin$ factors is a minima' 'ife span of 3 !ears% From a different stance, a $raphic disp'a! of the price action can provide an intuitive fee' for the texture of the mar&et% A showcase 'a! in the head! sur$e of the ourse after the financia' crisis of *++< and its fa''out% "oreover a concurrent disp'a! of the assets under review can hi$h'i$ht an! diver$ence in performance% For the case stud! at hand, the difference in ehavior is spot'i$hted ! the exp'osive ascent of IBB over the course of the past !ear% To p'ace the performance of the pacers in context, the hi$h f'!ers were compared a$ainst a renowned enchmar& of the stoc& mar&et% The touchstone too& the form of .P4 whose mission is to trac& the f'a$ship index of the stoc& mar&et% As thin$s turned out, the trio of winnin$ funds 3 name'!, IBB, PJP and XBI 3 trounced the esta 'ished enchmar& of the ourse ! a heft! mar$in%

Further Information
In si6in$ up an asset for investment in an! domain, the prospective pa!off has to e wei$hed a$ainst the ris& entai'ed% The crucia' factors to consider are surve!ed in the section on Financial Risk at "int#it BoreH httpHIIwww%mint&it%comIris&% A primer tit'ed JKow to Beat the Investment FundsL /"int&it Bore, *+,- 0 $ives the 'owdown on $rowth and ris& for exchan$e traded funds% "oreover the surve! app'ies the $enera' $uide'ines to a case stud! of index funds for the emer$in$ mar&ets of Bra6i', Bhina, India and Russia%

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The data avai'a 'e on exchan$e traded funds is often patch!, fau't! andIor mis'eadin$% These stum 'in$ 'oc&s, a'on$ with a 8uiver of defensive moves for the war! investor, are examined in an artic'e on JBrudd! Information on (xchan$e Traded FundsL /"int&it Bore, *+,-a0%

#eferences
#im, .% ildcats !f Finance% "int#it%comH "int#it Press, *+,,%

httpHIIwww%mint&it%comI>i'dcats7of7Finance 3 tapped *+,-I3I,*% "int&it Bore% JBrudd! Information on (xchan$e Traded FundsL% httpHIIwww%mint&it%comIcrudd!7information7exchan$e7traded7funds 3 tapped *+,-aI3I,*% "int&it Bore% JKow to Beat the Investment FundsL% httpHIIwww%mint&it%comI eat7 investment7funds 3 tapped *+,- I3I,*% "ornin$star% J(TF PerformanceL% httpHIInews%mornin$star%comIetfIMistsI(TFReturns%htm' 3 tapped *+,-I3I3% 5 5 5

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