Yet another rate cut has come and gone, and even with somewhat steady inflation reads, further cuts may be in the pipeline. Debt-heavy areas like tech stand to benefit, but for those already heavily exposed to big tech names, looking elsewhere may appeal. Biotech presents a subcategory that offers growth and innovation, but with exposure to healthcare that limits its reliance on AI advancements. The biotech ETF SBIO, for example, has surged over the last three months likely due to rate cuts.
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Why might a biotech ETF benefit so much from rate cuts? Many biotech firms must take on significant debt early on to finance research and development of new drugs. Those drugs spend years before the FDA in various clinical trials before they can start producing revenue. Those firms that don’t benefit from M&A suffer when debt servicing costs rise.
Rate cuts, then, stand to benefit biotech more than other, more mainstream tech areas. Small-cap tech names pushing new technologies also take on significant debt, but they don’t face the same regulatory hurdles. Rate cuts, then, offer a significant dislocation to biotech’s benefit.
SBIO, the ALPS Medical Breakthroughs ETF, has seen its performance spike over the last few months. Having trailed the SPDR S&P 500 ETF Trust (SPY) for much of the year, per YCharts, it has outperformed the key fund over the last three. SBIO has returned 17.2% over three months compared to 12.3% for SPY. That surging momentum appears in its tech chart, too. SBIO’s price sat at $41.3 as of November 13, above both its 50- and 200-day simple moving averages.
SBIO will celebrate its 10th anniversary next month. The fund invests in biotech names with drugs in Phase II or Phase III of FDA clinical trials. It screens for sustainability, looking for firms with sufficient cash on hand to last two years. The ETF has a 0.50% expense ratio.
Looking ahead, further rate cuts could bolster SBIO even more. The biotech ETF presents a route into tech growth without just holding the big six or seven tech firms. For those looking for a fresh start entering 2025 in equities, SBIO may intrigue.
VettaFi LLC (“VettaFi”) is the index provider for SBIO, for which it receives an index licensing fee. However, [ETF SBIO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of SBIO.
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