IBB and XBI are two of the most popular biotech ETFs on the market. I previously wrote up a post on IBB here, running through its holdings. Biotech stocks are speculative with major drug approvals potentially moving stocks up or down by double-digit percentage points. This makes exposure to this market compelling for those with a bullish bent on the industry over the long-run or for those seeking access to a market that could benefit from more “returns chasing” capital inflows as competing assets become more expensive. XBI differs from IBB given the former’s equal-weighting structure (as opposed to market cap weighting). It is also most heavily concentrated in small and micro cap stocks (58%), with little held in large caps (19%). The number of holdings in XBI is smaller at 95 versus 160 for IBB. XBI is also slightly cheaper at 35 bps versus 47 bps for IBB (i.e., $35 for every $10,000 invested with XBI, versus $47 per $10,000 invested for IBB). With its more limited holdings and focus on smaller companies, XBI also carries more volatility (and risk) accordingly. Since February 2006 (the point from which both funds have traded simultaneously), XBI has returned 14.5% annualized versus 12.4% for IBB (SPY: 8.0% annualized). The 200 basis points in additional annualized returns have nonetheless come at the cost of 33% more volatility. XBI has been 90% more volatile than the broader market while IBB has been 43% more volatile. So in some way, risk has mirrored return. Is XBI or IBB beneficial as a general portfolio diversifier? Not really. Over this same period, SPY has held a +0.93 correlation with both XBI and IBB, meaning their up and down movements have roughly come fairly well in lockstep. So the diversification benefit – namely, to reduce covariance between assets in a portfolio to improve risk-adjusted returns – doesn’t have much merit in this case.Therefore, buying one or both would be most appropriate for those bullish on biotech or else to chase higher returns in a portfolio (at the expense of higher risk). What does XBI hold? With its equal-weighting criteria, you still get Biogen (BIIB), Gilead (GILD), Amgen (AMGN), Celgene (CELG), and the like, but at roughly the same weightings as everything else. With 95 holdings, everything will be weighted at just under 1%. Due to the whimsical nature of biotech, these will sometimes get out of line, but not by much. Only three companies have weightings above 2.5% -- KITE, EXEL, and ALXN. Sixteen have weightings above 2%, the previous seven mentioned, in addition to VRTX, NBIX, CLVS, SRPT, ACAD, EXAS, ALNY, INCY, and ABBV. As is natural, most stocks in this fund have lost value over the course of the past year (56%), which illustrates the positive aspect of having biotech exposure as a basket of securities. Despite XBI’s market-beating returns, the majority of the gains have been derived from a small portion of the holdings, similar to “FAANG” and the S&P 500. To do well in biotech through the selection of specific names, one really needs to have keen insight into the industry, generally through a robust rolodex of individual contacts. Running a limited portfolio of individual biotech names is a sink-or-swim game if you don’t have any particular information advantage. For “normal” companies, buy-and-hold will generally work if you have a long enough timeframe given the market goes up over time and that trend is expected to continue. In biotech, that strategy is shakier and requires a more diversified approach to the industry. Very few institutional managers can provide value in biotech (i.e., stock picking talent) given the vagaries involved. A complete list of XBI’s holdings can be found below: