Regarding the healthcare sector again disappointing investors in 2025 — the largest ETF addressing the group is up just 11.39% — there are pockets of strength. Those include biotech stocks and the related ETFs.
Somewhat quietly, the ALPS Medical Breakthroughs ETF (SBIO) entered November 17 residing around 52-week highs and sporting a YTD gain of nearly 43%. To be sure, those are impressive statistics. But they don’t imply upside from here is limited for mid- and small-cap biotech stocks. That’s the asset class SBIO focuses on.
Actually, SBIO’s 2025 bullishness could be a sign of things to come in 2026. That’s particularly so if the Fed cooperates and continues lowering interest rates. It has done so twice this year.
Sparks for SBIO Could Emerge
In assessing mid- and small-cap biotech stocks, interest rates are important. That’s because many companies in this space are cash burners with little near-term hope of profitability. SBIO eases that burden by requiring member firms to have enough cash to survive for an extended period of time while mandating that companies have at least one drug in advanced (Phase II or III) clinical trials.
Still, lower interest rates could be impactful for another reason. Reduced borrowing costs could compel some suitors to more closely examine smaller biotech companies. They may already be doing because they need to backfill expiring patents.
“Patent expiry is our normal part of the life cycle of drug development. Every company goes through this at some point, but this does put the focus on company’s internal pipelines to continue to progress while also being able to access external innovation via M&A. Recently we have started to see a pickup in deal activity, which could bode well for performance in SMID-cap biotech,” observed Terence Flynn of Morgan Stanley.
As highlighted by SBIO’s 2025 bullishness, smaller biotech companies are responsive to Fed easing. And that’s not a one-off scenario. There’s a documented history of that happening. That indicates that if the central bank becomes more accommodative, this ETF could benefit.
More Potential Spending in the Pipeline
“They’re sensitive to M&A. So, as rates come down, we expect more spending on pipeline and more M&A activity, which is generally positive for the sector. Looking forward, biotech sector is generally the best performing sector on a six-to-12-month timeframe post the first rate cut,” noted Morgan Stanley’s Sean Laaman.
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