Broader healthcare ETFs aren’t doing much to appease investors this year, but biotech funds are warding off that weakness. Just look at the ALPS Medical Breakthroughs ETF (SBIO).
The combination mid-cap/small-cap ETF, which tracks the S-Network Medical Breakthroughs Index, is up more than 12% since the start of year. That’s an impressive showing in less than four months. However, it may give some investors pause about getting involved today.
Naturally, some investors are concerned about missing out on the “easy money” and arriving at parties too late. However, there are reasons to believe SBIO has more upside ahead of it. The regulatory environment is less worrying than many investors thought. This is relevant to SBIO. The index mandates that member firms have at least one drug or therapy in Phase II or III trials.
“As to the regulatory backdrop, concerns related to FDA dysfunction have not manifested nearly as significantly as feared,” noted Jon Stephenson of BNP Paribas. “What’s becoming clearer to investors is that, other than vaccines and some of the more controversial innovations such as gene therapy, most things at the Food & Drug Administration are running on time.”
A Familiar Catalyst Is Boosting SBIO
Outside of FDA approvals, the other big catalyst for smaller biotech companies, including SBIO components, is consolidation talk. Even better are deals being struck. The ALPS ETF is tethered to that theme because it has well-documented history of being home to takeover targets.
“We’ve seen a continued pace of mergers and acquisitions activity, most notably with large cap biopharmaceuticals purchasing small and midcap biopharmaceutical companies to resolve pending patent cliffs,” added Stephenson.
SBIO requires holdings to be financially sturdy enough to survive at least two years at their current cash burn rates. That implies SBIO holdings aren’t cash-strapped and can dedicate themselves to innovation, which is critical in biotech.
“Specifically, innovation trends remain strong,” observed Stephenson. “The funding backdrop [has]improved significantly over recent months and that gives companies the ability to deploy capital against their R&D initiatives and to hold on for better prices when they’re negotiating with large cap biopharmaceutical companies on M&A.”
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VettaFi LLC (“VettaFi”) is the index provider for SBIO, for which it receives an index licensing fee. However, SBIO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of SBIO.
