By Snehasish Chaudhuri, MBA (Finance)
During the past one year, most biotechnology stocks registered strong price growth. Due to this, First Trust NYSE Arca Biotechnology Index Fund (NYSEARCA:FBT) had a price rise of 23 percent during the same period. This growth is double the long-term average price growth achieved by this fund. Due to poor price growth of biotechnology stocks, the fund was trading at a low price one year ago, when I covered this fund the last time. However, the biotechnology sector was on the path to recovery, so many long-term investors remained invested in this fund. One year later the price has shot up, and currently is in a descending trend. In absence of any dividend pay-out, I don’t see much rationale behind holding or accumulating units of this fund.
FBT’s Equal Dollar Weighted Portfolio Invests in Similar Stocks
Launched on 19th June, 2006, First Trust NYSE Arca Biotechnology Index Fund has an equal dollar weighted portfolio of biotechnology and life science stocks. It seeks to track the performance of the NYSE Arca Biotechnology Index (BTK), by using full replication techniques. As a result, the fund generally invests at least 90% of its net assets (including investment borrowings) in the common stocks and depositary receipts that comprise the index. The fund has a decent turnover ratio of 39 percent. Despite that, over the past 12 months and after four portfolio reshufflings, only two stocks have been replaced. Medtronic plc (MDT) and Nektar Therapeutics (NKTR) were replaced by Mettler-Toledo International Inc. (MTD) and Genmab A/S (GMAB). FBT CEF has an expense ratio of 0.56 percent and has a relatively high assets under management of $1.47 billion.
FBT’s Biotechnology Portfolio Registered Remarkable YoY Price Growth
Top 75 percent of investments of First Trust NYSE Arca Biotechnology Index Fund in the biotechnology sector included 22 stocks. This list included Agios Pharmaceuticals, Inc. (AGIO), Biogen Inc. (BIIB), Ultragenyx Pharmaceutical Inc. (RARE), ACADIA Pharmaceuticals Inc. (ACAD), Vertex Pharmaceuticals Inc. (VRTX), Alkermes plc (ALKS), Qiagen N.V. (QGEN), Exact Sciences Corporation (EXAS), Alnylam Pharmaceuticals, Inc. (ALNY), Exelixis, Inc. (EXEL), Sarepta Therapeutics, Inc. (SRPT), Genmab A/S (GMAB), BioMarin Pharmaceutical Inc. (BMRN), Ionis Pharmaceuticals, Inc. (IONS), Grifols, S.A. (GRFS), Regeneron Pharmaceuticals, Inc. (REGN), Neurocrine Biosciences, Inc. (NBIX), Amgen Inc. (AMGN), United Therapeutics Corporation (UTHR), Seagen Inc. (SGEN), Moderna, Inc. (MRNA), and Gilead Sciences, Inc. (GILD).
During the past one year, prices of SRPT, EXAS, ACAD, ALNY, BIIB, SGEN, GMAB, AGIO, VRTX and GILD grew in excess of 20 percent. This is remarkable considering that the S&P 500 grew only by 3.6 percent. Prices of another five stocks – BMRN, IONS, RARE, REGN and EXEL – also grew at a much higher rate than that of S&P 500. As a result, FBT registered a price growth of 15.5 percent. Thus, this fund seems quite exciting. But, unfortunately this is not the entire story. The very same fund registered price growth of only 0.27 percent during 2023. Only EXAS, ACAD and SGEN were able to grow in excess of 20 percent. Price growth of S&P 500 during the same period was almost 10 percent. So, it won’t be wrong to say, things have been reversed in 2023, and that doesn’t speak well about First Trust NYSE Arca Biotechnology Index Fund.
FBT Successfully Achieved its Growth Potential with a 23 Percent Price Rise
The fund invested in a few life sciences tools & services, too, such as Bio-Techne Corporation (TECH), Charles River Laboratories International, Inc. (CRL), IQVIA Holdings Inc. (IQV) and Mettler-Toledo International Inc. First Trust NYSE Arca Biotechnology Index Fund does not pay any dividend, although it is in a strong position to do so. During the period 2016 to 2021, FBT generated an annual average total return of almost 7.715 percent.
During my last coverage of First Trust NYSE Arca Biotechnology Index Fund, I mentioned that “Continuing with similar growth over a longer time horizon is very much possible, due to its effective portfolio reshuffling on a quarterly basis, and the potential of the biotechnology sector to post high growth over the long term.” I believe, this time FBT has been able to achieve its goals with a 23 percent price growth over the past year. During the past 10 years, the price of this fund grew by 10 percent (CAGR). During the past 17 years of its existence, FBT had a price CAGR of 12.5 percent. Weighted average price to earnings (P/E) ratio of 17.23 suggests that the stocks in which FBT invests are no more undervalued. The fund is priced around $154 and is trading almost at par (discount of 0.05 percent) to its net asset value.
Investment Thesis
First Trust NYSE Arca Biotechnology Index Fund historically performed well, and beat the returns of S&P 500, banking on the rise of biotechnology stocks. This has largely been the scenario during 2022, too. Most stocks in FBT’s biotechnology portfolio had overgrown returns of S&P 500 during that period. As a result, FBT registered a price growth of 15.5 percent during the past one year. During my last coverage in May 2022, I recommended a hold on this fund, and FBT’s strong performance thus worked well for its investors. However, over the past five months, the return has been much lower than S&P 500, and price growth of stocks in FBT’s portfolio has largely been disappointing.
The fund also is in a downward trend. The fund saw a series of minor falls to reach the current level of around $141, which is very close to the 52-week low of $138.59. There is a likelihood of this price falling further down to cross the 52-week low, before it may bounce back. This assumption gets further validation as the long-term moving average of this fund is positioned above the short-term moving average. This technical indicator suggests a probable downward movement during the short run. Thus, despite an overwhelming price growth of First Trust NYSE Arca Biotechnology Index Fund, I am not very optimistic about this fund. In absence of any dividend pay-out, I don’t see much rationale behind holding or accumulating units of FBT.
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