The biotech sector is pulling back, but new breakthroughs and the aging demographics could continue to support gains in biotechnology exchange traded funds.
Biotech stocks have dipped over the past week after posting robust gains. Over the past week, the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB) fell 5.5%,First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT) dropped 5.3% and SPDR S&P Biotech ETF (NYSEArca: XBI) declined 6.8%. [Biotech ETF Run not Over Yet, Says Analyst]
Nevertheless, the current weakness may only be a temporary setback. The portfolio manager of Fidelity Select Biotech, Rajiv Kaul, argues that the biotech industry will do well in the long run as the industry has been doing “numerous amazing things” when it comes to new therapies that save patients, reports Nana Sidibe for CNBC. [A Big Test for a big Biotech ETF]
The industry has shifted away from expiring patents on blockbusters to more specialized drugs that treat specific diseases. While investors may be focusing on the short-term pullback, Kaul reminds people to look at the fundamentals of the sector and understand the current period of innovation.
“I think this is going to be an extremely rewarding period for our shareholders and most importantly for the patients who can really benefit in this great time in innovation and medicine,” Kaul said on CNBC.
While Fidelity does not offer a biotech ETF, the provider has a Fidelity MSCI Health Care Index ETF (NYSEArca: FHLC), which includes a 22.4% tilt toward the biotech sub-sector.
Additionally, the strategist also points out that the sector has repeatedly produced solid earnings growth, which would help support the higher valuations for the growth sector.
“If you just look at the largest biotech companies, look at their compounded earnings growth in the last four-five years, it’s 30 to 40 percent,” Kaul added.
The industry is rife with takeover bids as larger companies build their products through mergers and acquisitions. [ETFs for the Next Biotech Takeover Targets]
Kaul also suggests focusing on good companies with solid drugs that have the highest probability of success. Moreover, investors should keep a more long-term view.
IBB tracks a market-cap-weighted Nasdaq Biotechnology Index, which includes significant positions in big industry names, such as a 8.3% position in Amgen (NasdaqGS: AMGN), 8.1% in Gilead Sciences (NasdaqGS: GILD), 7.6% in Celgene (NasdaqGS: CELG) and 7.4% in Biogen (NasdaqGS: BIIB). FBT and XBI, on the other hand, take a more equal-weight approach to the sector, which give the two ETFs a greater mid- and small-cap tilt.
iShares Nasdaq Biotechnology ETF
For more information on the biotech sector, visit our biotechnology category.
Max Chen contributed to this article.