Large-cap biotechnology stocks finally have some momentum, but relative to the broader healthcare sector, biotech is a 2021 laggard.

The situation is worse for smaller biotech stocks and the related exchange traded funds, many of which are in the red on a year-to-date basis. That’s the case for the ALPS Medical Breakthroughs ETF (SBIO) but look now because SBIO is higher by 5.37% for the month ending Sept. 3. Some market observers are optimistic that small mid-cap biotech names will bounce back before year-end, assuming some headwinds abate.

“Investors and analysts widely agree that the slump since February has something to do with confounding signals coming out of the U.S. Food and Drug Administration, an agency that has enormous sway over the fate of the sector and one that has been without a permanent leader since President Joe Biden assumed office,” reports Josh Nathan-Kazis for Barron’s.

Stability at the FDA is essential for all biotech companies, but it’s particularly relevant to SBIO member firms and investors. The ALPS fund only includes companies with at least one drug or therapy in Phase II or Phase III clinical trials.

In normal environments, that’s beneficial because that methodology keeps speculative, pre-trial names out of the fund.

“Investors have also worried about a Federal Trade Commission warning earlier this year that it intended to take a more aggressive approach toward regulating pharmaceutical mergers, not to mention the resurfacing of the perennial drug-pricing debate,” according to Barron’s.

Despite the regulatory issues, some analysts see opportunity with some beaten-up smaller biotech names. That group includes AlloVir (ALVR), a $1.3 billion company that’s off more than 48% year-to-date. AlloVir is on a list of five biotechnology stocks loved by analysts and investors. More importantly, it’s a member of SBIO’s roster.

Another overhang regarding SBIO this year is a sluggish pace of mergers and acquisitions activity. SBIO member firms are capped at market values of $5 billion upon inclusion, making the fund a prime hunting ground for takeover targets. Many companies residing in the fund have been acquired over SBIO’s nearly seven years on the market. As FDA concerns ebb, dealmaking could pickup, according to analysts. SBIO could benefit along the way.

Other biotech ETFs to consider include the VanEck Vectors Biotech ETF (BBH), 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.