XBI vs IBB Biotech ETF Comparison
XBI vs IBB, or the iShares Biotechnology ETF and the SPDR S&P Biotech ETF, are both index funds in the health and biotech fields.
The biotechnology industry can be very volatile, it is not uncommon to see 20%, 30%, or even 50% rises or drops in a day for some of these companies, particularly the small caps.
Getting involved in this sector requires a very high risk tolerance, you need to be comfortable with large swings which of course includes having the stomach to possibly be looking at quite large unrealized losses.
However naturally such huge potential gains are very attractive, so by investing in an ETF you may reduce some of your overall risk but can still catch some large gains, though probably not the large 20%, 30% or 50% seen in single stocks.
The XBI ETF targets lower cap biotechnology industries, while the IBB ETF targets more established or the higher cap stocks in the sector.
In order to figure out whether XBI or IBB is the best investment for you, there are a number of considerations that we will take a look at. All data taken from February 17th 2023.
XBI vs IBB: Biotech ETF Comparison
XBI vs IBB: Biotech ETF Holdings
The holdings of XBI vs IBB are very different. In the case of IBB, which is an index of U.S. companies listed on major exchanges, the top ten largest holdings make up almost 56% of the index fund. Biotech companies with larger market caps make up a larger percentage of its holdings. IBB is issued by iShares a subsidiary of Blackrock.
XBI on the other hand, has much smaller holdings in companies, and the top ten make up about 15% of the total fund.It is managed by State Street Global Advisors and its key information and important documentation are available to read.
The number of holdings also differ. IBB has about 275 different holdings, which you can see under "Portfolio Characteristics", while the XBI has only about 155 different holdings under "Fund Characteristics".
XBI vs IBB Biotech ETF: Risk
We can get a lot of information from a trading platform or broker.
When analyzing the volatility of XBI vs IBB through the use of implied volatility, you will see that the historical volatility of XBB is 29.154%, which is significantly higher than that of IBB at 19.153%.
You can see that IV at close for XBB was 30.592% on that day and the IV percentile of XBI is 1%, that means that its implied volatility of 30.592% is higher than only 1% of trading days over the last year, which means that 30.592% is incredibly low for this ETF, but not necessarily for other ETFs.
When I took this screengrab the IBB's had reset to zero because of President's Day which was a holiday on the market. But the day before its IV was 19.429%, so likewise IBB's IV percentile 2% means its IV of 19.429% is only higher than 2% of trading days over the past year. so again it is very low. You can read more about how IV percentile is calculated here, plus we also cover why it is often confused with IV rank.
Another way to determine the risk of an asset is by comparing the holdings. The number of holdings of XBI at 155, and IBB at 275 indicate that XBI could be more volatile, but we need to analyze these holdings.
XBI is made up of a lot of mid-cap and low-cap stocks, which may go bankrupt more easily than the larger and more-established companies of IBB.
The smaller size of the holdings may not be enough to mitigate this risk in the event of a crash in the entire sector.
XBI vs IBB Botech ETF: Performance
It is always difficult to predict the future performance of any asset. But one can make predictions by looking at the historical performance of the asset. At the time this graph was taken, one can see the performance of both XBI (blue) and IBB (orange) over roughly the past ten years.
As can be seen in the graph, XBI has continuously outperformed IBB when the market does well. It does also dip below IBB, when the market does poorly, indicating its higher risk, but these occasions have been pretty rare in the past, but of course we cannot guarantee this for the future.
The total growth of IBB over the past five years has been 18.88%, however XBI has had a loss of over the past five years of approximately 8.9%, which shows how volatile XBI can be. You can see from the graph there have been wild swings, huge gains in general to February 2021, and then steady drops since then.
XBI vs IBB Biotech ETF: Cost
The first thing that we need to look at when analyzing the cost of XBI vs IBB is the expense ratio. XBI has an expense ratio of 0.35%, while IBB has an expense ratio of 0.44%.
This means that for every $100 of the stock that is owned, it will cost you $0.35 per annum for XBI and $0.45 per annum for IBB.
Although this may not seem like a lot, it can add up greatly over time, and result in a decreased profit margin. Over ten or twenty years, 0.10% may prove to be a very large difference.
Additionally, the cost of purchase should be considered. XBI costs $88.76 per share at the time of writing this article, while IBB costs $133.33 per share.
XBI vs IBB Biotech ETF: Dividend Income
It is a good idea to look at the historical dividend yield of an ETF. There are multiple reasons for this. Firstly, dividend income is a good way to offset the expense ratio. Additionally, it is a good indication of how the index fund is doing in terms of profitability.
However, the net profit in relation to dividend yield and expense ratio for XBI results in a net loss of 0.18%, while IBB has a resulting net loss of 0.23%.
XBI vs IBB Biotech ETF: Conclusion
Although they are both in the biotechnology sector, they are incredibly different ETFs. There is very little overlap in their holdings, and there is nothing stopping a person from buying some of both, especially if you can purchase a fraction of share. Neither is considered to be a very expensive asset in comparison to some others.
However, in terms of cost and return, historically, XBI has proven to be a far better purchase than IBB. It is also historically the cheaper of the two to hold over several years.
IBB is more stable, and may be a better purchase in terms of risk management for a portfolio that is otherwise higher risk. If you are able to afford the slightly more expensive cost and you are willing to lose out on potential profits. It is also important to take the continuous costs associated through the expense ratio. This means it may not be the best long-term hold for those with smaller portfolios.
Which is the best Biotechnology ETF for you, XBI vs IBB, will determine largely on your trading style and the rest of your portfolio, as you can see above. Remember, the key to being a successful trader is to manage risk, and trade responsibly. So not take into account one factor in isolation before making your decision.