Clinical trials are of the utmost importance to biotechnology investors, but not all exchange traded funds adequately address the phenomenon. The ALPS Medical Breakthroughs ETF (SBIO) takes a different approach.

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.

“A Phase 1 trial is conducted with a limited number of subjects, usually fewer than 50. In cancer trials, the drug will be given to patients sometimes as a last resort,” according to Profit Trends.Drugs targeting diseases other than cancer are given to healthy volunteers so doctors can better understand how the drug reacts inside the human body. If a drug is deemed safe after this period, the company will proceed to Phase 2. This trial usually consists of a few dozen to several hundred patients receiving varying dosage levels of the particular drug.”

Clinical Trials, Plus a Strong Acquisition Play

Phase III U.S. Food and Drug Administration (FDA) clinical trials are where the investing magic happens.

“In Phase 3, companies test hundreds to thousands of patients. If the data proves that the drug is safe and effective, the company will usually apply for approval,” according to Profit Trends. “Naturally, the more patients who take part in a trial, the greater the chance the drug fails. For example, the drug may not work, or there may be unexpected side effects. This is especially common in cancer trials, where the response rates are low, even with approved drugs. Positive results in Phase 3 can push a stock higher as investors begin focusing on approval and the sales and profits that could follow.”

SBIO 6 Month Performance

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. Nearly 20 of the fund’s components have been acquired since it debuted in 2014.

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).

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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.