The S&P 500 Health Care Index is up almost 16% year-to-date. That’s a solid showing to be sure, but biotechnology stocks and exchange traded funds are still waiting on their moments.
With reasons growing to be bullish on the broader healthcare sector, ETFs such as the ALPS Medical Breakthroughs ETF (SBIO) could be ready for some upside into year-end and beyond.
“Following the worst of the COVID-19 crisis, elective care has resumed, high expenses related to COVID-19 patient care have subsided, and medical equipment and pharmaceutical stocks have recovered,” says David Kastner of Charles Schwab.
SBIO’s unique methodology remains relevant for investors looking to wager on a biotechnology resurgence. SBIO focuses on small- and mid-cap companies that have one or more drugs in either Phase II or Phase III trials. The component holdings have one or more drugs in either Phase II or Phase III U.S. Food and Drug Administration clinical trials.
Said another way, SBIO is a passive ETF, but its index methodology actively eschews highly speculative smaller biotechnology stocks, of which there are plenty, by focusing on companies that are at the very least in the mid-stage clinical trial arena. While it’s impossible to reduce all of the risks that come along with biotechnology stocks, SBIO mitigates some of those risks, enhancing its allure as a long-term holding, and long-term is how investors should approach healthcare.
“Meanwhile, the sector has many favorable long-term attributes, such as new cost-saving and care-improving advances in medical technologies, an aging global population, and a growing middle class in emerging-market economies—all of whom will demand more extensive drug treatments and medical care over time,” adds Kastner.
Another point in favor of SBIO is that healthcare is one of the sectors that historically perform well during inflationary periods, and with more market observers arguing that rising consumer prices are proving more persistent than transitory, biotech stocks could get a lift. Biotech is also supported by strong development pipelines, which could lead to new drugs and therapies coming to market next year.
Other biotech ETFs to consider include the VanEck Vectors Biotech ETF (BBH), the iShares Biotechnology ETF (IBB), and the Virtus LifeSci Biotech Clinical Trials ETF (BBC).
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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.
