The iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB), First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT) and the SPDR S&P Biotech ETF (NYSEArca: XBI), the three largest biotech exchange traded funds by assets, reside an average of 5.4% below their all-time highs reached last month, but that does not mean the bull market for biotech ETFs if flailing.
“Biotechnology has been one of the best performing industries in the stock market over the past several years. According to S&P Capital IQ, there were numerous catalysts, for this substantial stock outperformance, including several blockbuster drug approvals that drove significant sales and earnings growth. Yet, S&P CIQ thinks the industry’s drivers, including a robust pipeline, remain intact and have a positive fundamental,” said Todd Rosenbluth, director of ETF and Mutual Fund Research, S&P Capital IQ, in a recent note.
Strong earnings results will support the healthcare sector’s rising prices. Healthcare companies reported organic growth of all sectors, including 11% revenue growth and 22% earnings growth over the fourth quarter. Looking ahead, S&P Capital IQ projects S&P 500 healthcare earnings per share to rise 8.9% in 2015 year-over-year, compared to a 1.7% gain in the broader blue-chip index. [Healthcare Services ETFs Strengthening on Larger Client Base]
That strong organic growth coupled with rampant mergers and acquisitions activity and a slew favorable FDA news has helped scores of other healthcare ETFs pack on assets over the past several years. For example, investors have allocated a combined $1.74 billion to IBT, FBT and XBI this year.
“S&P Capital IQ equity analyst Jeff Loo expects approximately a dozen drugs to be approved and launched in 2015 with the potential to achieve blockbuster sales levels of more than $1 billion annually by their fifth year after launch (2020). Total sales for the seven biotech companies in the S&P 500 rose 41.5 % in 2014, driven by new drug approvals, and sales growth of 122%. In 2015, our forecasted rate of increase moderates to 13.2%, nonetheless, an impressive rate, in our view. Loo projects gross margin for those seven S&P 500 constituents, to widen to 89.8% in 2015, from 88.6% in 2014,” adds Rosenbluth.
Investors’ intense focus on cancer therapies has been a catalyst for biotech ETFs and that focus is expected to intensify in the near-term. With two major cancer conferences imminent, focused biotech ETFs, such as the BioShares Biotechnology Products Fund (NasdaqGM: BBP) and the BioShares Biotechnology Clinical Trials Fund (NasdaqGM: BBC), could be on the receiving end of some positive catalysts. [Bet on new Breed Biotech ETFs]
Year-to-date, five of the 10 top-performing non-leveraged sector ETFs are biotech funds, including BBP, BBC, XBI and FBT.
S&P Capital IQ has overweight ratings on FBT and IBB. The research does not currently rate the other ETFs mentioned here.
iShares Nasdaq Biotechnology ETF