In a somewhat quiet fashion, long-lagging biotech stocks and exchange traded funds are perking up. The ALPS Medical Breakthroughs ETF (SBIO) is part of that group.
SBIO gained nearly 2% last month. While that might not sound like much, the gain arrived as biotechnology stocks are attempting to snap out of a long-running slump. Over the past three years, the group has lagged the broader market and the healthcare sector. Importantly, August was an extension of what’s been a decent year for SBIO. The ETF entered this month with a 13.58% gain year to date, outpacing traditional small-cap indexes along the way.
That’s a solid foundation for allaying investors’ concerns about the veracity of the recent biotech rally. Over the past several years, the group has moved in fits and starts. And while valuations are attractive, biotech stocks ultimately disappointed market participants. That could be changing for the better.
Fed Could Lift SBIO
It’s widely expected that the Federal Reserve will lower interest rates this month. That could be a significant catalyst for biotech companies, including SBIO components. That’s because developing new drugs and therapies is capital intensive. Said another way, biotech stocks are often inversely correlated to rates. And that’s been on display over the past several years.
“Relief is on the way. The Federal Reserve is just a few weeks from cutting rates for the first time since 2020. And yes, a cut is all but certain, with the futures market reflecting a 65.5% chance of a quarter-point cut when the Fed makes its announcement on Sept. 18, and a 34.5% chance of a half-point decrease. That’s a big deal for biotech stocks,” reported Ben Levisohn for Barron’s.
Rate cuts could be helpful to SBIO, but there are potential catalysts for the biotech space. Those include the improving financial health of the group at large.
“The universe of biotech stocks has also improved. Just 693 small- and mid-cap biotechs were cash-flow negative during the second quarter of 2024, down from 949 during the same quarter in 2022, but equal to the number during the first quarter of this year,” according to Barron’s.
Biotech firms’ cash positions are always scrutinized. And that’s amplified among smaller companies that haven’t yet brought drugs to market. However, SBIO skirts some of those concerns because the ETF’s member firms are required to have two years worth of cash to survive at their current burn rates.
Additionally, lower interest rates could prompt some large-cap healthcare companies to finance acquisitions with debt. That could be a spark for SBIO because the ETF has long been home to takeover targets.
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