On Friday, FTSE Russell, one of the largest providers of benchmarks used by providers of index funds and ETFs, reshuffles its widely followed indexes, including the Russell 1000 and Russell 2000, among others.
It’s expected that healthcare will see increased weights in those indexes and others and with some smaller names in the sector either graduating to larger stock benchmarks or making their debuts in small-cap indexes, ETFs focusing on smaller healthcare names could get some residual benefit. Enter the ALPS Medical Breakthroughs ETF (SBIO).
“Every year in June, markets focus on the Russell rebalance for a scorecard on the current state of the US equity markets and ‘Russell Recon’ always has an interesting story to tell,” writes Catherine Yoshimoto, director, product management at FTSE Russell. “This year is no exception, with market watchers predicting record volume for Friday, June 26—rebalance day—due to significant market shifts in recent months.”
For its part, SBIO tracks the S-Network Medical Breakthroughs Index. That benchmark caps the market value of its components at $5 billion upon rebalancing, meaning the fund focuses on mid- and small-cap fare.
Why It’s Important
“Lori Calvasina, head of U.S. Equity Strategy at RBC Capital Markets anticipates nearly half of the stocks being promoted to the Russell 1000 from the Russell 2000 will be healthcare names,” according to the New York Times.
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.
Six initial public offerings are entering the small-cap Russell 2000, all of which hail from the healthcare sector. SBIO is up nearly 52% in the second quarter and is flirting with all-time highs after its 1.35% gain on June 22.
Other biotech ETFs include the VanEck Vectors Biotech ETF (BBH), iShares Nasdaq 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.
