Capture Medical Breakthroughs and Big Acquisition Bucks with 'SBIO'

Already off to a strong start in 2021, the ALPS Medical Breakthroughs ETF (SBIO) extended the good vibes by jumping 9% in the first full trading week of February.

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. In a Phase II trial, the drug is administered to a group of 100-300 people to see if it is effective and to evaluate its safety. In a Phase III trial, the drug is given to a larger group, between 500-3,000 people, to confirm its effectiveness, monitor side effects, compare it to commonly used treatments, and collect information that will allow the drug or treatment to be used safely.

After the first week of February, SBIO was higher by 19.34% to start 2021, buoyed by investors’ affinity for investments with links to the coronavirus treatment process and expectations of strong consolidation activity in the biotechnology space this year.

SBIO 1 Year Performance

Speaking of Consolidation…

In addition to being an ideal clinical trial play, SBIO is also one of the premier avenues for accessing biotechnology stocks that are takeover targets. 20 of the fund’s components have been acquired since it debuted in 2014.

On February 1, 2021, Viela Bio Inc. (VIE, 1.71% weight) announced it would be acquired by Horizon Therapeutics (HZNP, not in SBIO*) at a 53% premium in an all-cash deal. The deal marks the 20th SBIO constituent to be acquired since its inception on December 30, 2014, with the average premium paid by the acquirer of an SBIO constituent standing at 51.90%.

SBIO is one of the original exchange traded funds dedicated to small- and mid-cap biotechnology stocks. Alone, that trait enhances the fund’s relevance in a brisk takeover environment, but there’s more to the story.

The fund is frequently home to credible takeover targets because its components must have drugs in Phase II or Phase III trials and the its holdings must have enough cash to survive at least two years at current burn rates. Either of those traits or a combination of the two make for alluring investment opportunities.

Other biotech ETFs to consider include the VanEck Vectors Biotech ETF (BBH), iShares Nasdaq Biotechnology ETF (IBB), and the Virtus LifeSci Biotech Clinical Trials ETF (BBC).

For more on cornerstone strategies, visit our ETF Building Blocks Channel.

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.