Why IBB Handsomely Outperformed Broader Indices
BlackRock Fund Advisors or BFA, the fund managers of the iShares NASDAQ Biotechnology ETF (IBB), uses a passive or indexing approach to achieve the fund’s investment objective. The indexing strategy involves investing in securities of the NASDAQ Biotechnology Index, such as Biogen (BIIB) and Gilead Sciences (GILD) in approximately the same proportions as in the index. Consequently, the fund doesn’t aim to beat the index—it tries to imitate the index. Though this strategy negates the chance of the fund substantially outperforming its underlying Index, it helps to mitigate risks involved in active fund management, like substandard security selection. Indexing also helps keep costs lower and can mean better after-tax performance by keeping portfolio turnover low compared to actively managed investment companies.
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Historically, IBB has provided healthy returns and strongly outperformed the broader equity indices. As the chart above shows, in the last five years, IBB is up 136.4%—delivering almost twice the gains of the S&P 500 (SPY)(IVV), Dow Jones Industrial Average, and Russell 2000 Index. IBB’s outperformance over major indices has continued this year as well. Year-to-date, IBB is up 25.1%—much higher than the 19.4% gains generated by the NASDAQ Composite Index and way ahead of major indices like the S&P 500, Dow Jones Industrial Average, and Russell 2000 Index with returns of 11.5%, 12.4%, and 5.0%, respectively. Obviously these strong returns do come with high risks, and you can see when the market pulls back, the IBB tends to underperform rather dramatically.