When prices in the market rise, risk premia compress, and there is too much money chasing too few opportunities, there is the tendency to chase more volatile stocks in the hope of generating sufficient returns. We see this in tech and we also see it in biotech. Biotech is very much a boom-and-bust industry, with many of the small- and mid-cap companies dependent on just a few products to support essentially the entirety of its value. Depending on how data results, FDA approvals, etc., turn out – and the lack of predictability surrounding these events – stocks will jump around to a large degree. But given biotech is an industry that signals innovation, growth, and affords patent protections as a form of legally regulated competitive insulation, it’s a place to look for those wanting at least the opportunity for high returns. This sector fits the same type of profile as tech wherein a high amount of risk is inherent in the industry – namely, companies are often heavily dependent on a single product for the lion’s share of the revenue, most don’t consistently generate profit or there is a lack of clarity on what these profits might be quarter to quarter, and most have large amounts invested in R&D on projects by which there’s a high level of uncertainty in the outcome. Biotech had a nice run up from the March 2009 lows to the summer of 2015, increasing close to 7x. At that point it gave up about 35% of its gains over the course of about six months. It has been reasonably bullish since November 2016, though volatility is simply a natural part of the experience. All ETFs are created as part of investor demand. Much of the general industry products (i.e., tech, energy, utilities, biotech) have their holdings skewed toward large cap holdings. The iShares NASDAQ Biotechnology ETF (IBB) is structured the same way, with the top 10 holdings taking up nearly 60% of the weighting, though 164 stocks comprise some portion. Other general statistics, including breakdown by geography and capitalization, can be found below (click to enlarge): The top names in the fund are all well-known for those who follow the industry – Celgene (CELG), Biogen (BIIB), Amgen (AMGN), Gilead (GILD), Regeneron (REGN), Alexion (ALXN), Vertex (VRTX), Incyte (INCY), Illumina (ILMN), and Mylan (MYL). Many of these have multiple franchises, multiple products, dozens of products in their pipelines, and high revenues and positive cash flow. Since investors generally go for the bigger names – for the reasons mentions, in addition to liquidity, sell-side coverage, among other factors – these stocks will tend to dominate the indexes. The next five down the list – Biomarin (BMRN), Shire (SHPG), Jazz (JAZZ), Alkermes (ALKS), and Seattle Genetics (SGEN) – are more focused on a limited range of products relative to the above. In the top 10, we have a few that are around or above $100 billion in market cap. In these five, market valuations are more in the $5 billion to $20 billion range. Naturally, 67% of the value of the fund is concentrated in the top 15 holdings (click to enlarge). As we get past the top 15, we have companies that are far more speculative in nature. Many regularly come up in the “Who will [insert top-10 name] buy next?” type of discussion. Tesaro (TSRO), Kite (KITE), Bluebird (BLUE), Clovis (CLVS), and Neurocrine (NBIX) fit this narrative. Gilead is commonly rumored in these types of discussions as run-off in its HCV business has put pressure on the company to make a transformative acquisition of some type. Beyond the top 30, Intercept (ICPT) and Portola (PTLA) have been making headlines recently, but after that the names get far more anonymous. Anyone who bets the entirety of their life’s savings into any one of them might get very rich or very poor, with the median likelihood generally toward the latter, just as a matter of how undiversified boom-or-bust businesses generally pan out. By holding #68 in the fund, each stock holds less than a 0.20% allocation in the fund. If anything, it is at least somewhat interesting to see how each stock you own makes up a certain percentage of the “biotech market” on the basis of this particular fund. The remainder of the holdings are shown below. If you own a US-based biotech, it is more likely than not that it's on the list.