Biotechnology ETFs, including the ALPS Medical Breakthroughs ETF (SBIO), are on torrid paces in the second quarter. Yes, some of that bullishness is attributable to the industry’s efforts to vanquish the coronavirus, but there’s more to the story.
With the COVID-19 pandemic raging, biotechs that are consistently profitable and that offer drugs that patients absolutely must have could be seen as relatively safe compared to many other stocks on the market.
“Biotechnology has been the bright spot in an outperforming sector,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a recent note. “Despite its growth image, the biotechnology sub-industry proven resilient in periods during the recent market volatility, outperforming the broader health care sector year-to-date through June 12 as well as in the past 13 weeks as the broader stock market recovered.”
SBIO is higher by more than 58% in the second quarter, as of June 17, confirming that the fund’s emphasis on smaller companies (market values capped at $5 billion at rebalance) and those with advanced stage trials (Phase II or Phase III) is a potentially potent mix for investors.
Many big pharmaceutical and biotechnology companies are no longer relying on blockbuster drug sales as many of their intellectual property rights expire. Instead, many are now relying on targeted or specialized therapies or treatment methods, which has increased the demand for mergers and acquisitions for smaller developers and research companies.
SBIO’s focus on companies that are beyond Phase I clinical trials is important at a time when the coronavirus is changing the biotechnology narrative.
“CFRA Equity Analyst Kevin Huang thinks while the coronavirus pandemic has upset the research and development timelines of many biotech companies, the pandemic has also shifted the narrative away from high drug prices and towards the numerous potential cures and vaccines that are being developed for Covid-19,” notes Rosenbluth.
SBIO is also worth considering if the U.S. economy takes a while to rebound from the pandemic. SVB Leerink analyst Geoffrey Porges recently pointed out in a note to clients that biotechnology and pharmaceutical benchmarks topped the broader market during the 2001 recession, the global financial crisis, and during the current economic malaise.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.