While many investors are on the lookout for ETF opportunities in rate cuts, one particular strategy is already standing out. The biotech ETF SBIO is riding some positive momentum thanks to some major changes in the space this year. The strategy has, in turn, produced some notable performance that, with rate cuts on the horizon, could give it another boost. That could make it a standout option for a thematic ETF addition to a core set of holdings.
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SBIO, the ALPS Medical Breakthroughs ETF, launched almost a full decade ago. The biotech ETF arrived on the scene in late December 2014. Charging 50 basis points (bps), the strategy tracks a market-cap-weighted index of U.S. biotech firms. It equally weights a list of firms that have one or more drugs in neither Phase II nor Phase III FDA clinical trials. The strategy screens for factors like sustainability, looking at firms with enough cash on hand to last two full years.
The biotech ETF has benefited from a major change in the space as biotech M&A activity has risen. Specifically, firms in SBIO’s zone, those with Phase II or Phase III drugs, benefit from M&A business.
Rate cuts may benefit not only M&A but also the borrowing costs those firms face. Many biotech firms face significant borrowing costs as they borrow heavily at the start with the hope that successful drug approvals can provide future revenues. Rate cuts could also benefit many firms that already meet SBIO’s standards.
The biotech ETF has returned 13.8% YTD on a cumulative NAV basis, per SS&C ALPS Advisors data. SBIO may appeal to investors looking for a thematic ETF to add to their core holdings, one that could particularly benefit from rate cuts.
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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.
