Biotech stocks and related ETFs are in the midst of a lengthy period of underperformance. For the three years ending July 9, the largest ETF in the category returned just 11%. That’s a fraction of what investors would have earned with large-cap growth or S&P 500-tracking funds.
To its credit, the ALPS Medical Breakthroughs ETF (SBIO) was far better than its large-cap counterpart over that span. But broadly speaking, smaller biotech stocks haven’t done enough in recent years to foster confidence and excitement among investors. Stocks in the small- and midcap biotech arena certainly haven’t delivered enough to compel market participants to ditch broader gauges of smaller equities.
That tide could be turning. SBIO’s 31.28% gain over the past 90 days reflects optimism that smaller biotech stocks could finally be on the cusp of giving investors something to crow about. That’s an impressive rally in a short time. But market participants who missed out on SBIO’s pop can take heart. That’s because some experts believe small-cap biotech is read for a potentially lengthy rebound.
Tailwinds Abound for SBIO
One of the reasons SBIO could be a consideration for tactical investors in the second half of 2025 and beyond is the strides being made in biotech product pipelines. That’s highly pertinent in discussing SBIO’s prospects. That’s because the fund’s index mandates that member firms have at least one drug or therapy in Phase II or Phase III clinical trials.
“Importantly, the attractive valuations have coincided with improving biotech product pipelines. Eirene Kontopoulos, a Fidelity biotech analyst and portfolio manager, says that historically, periods of positive clinical trial data have presaged subsequent industry investment returns,” according to the asset manager.
Improving Biotech Product Pipelines: A Source of Allure
Speaking of pipelines, that’s a source of allure for prospective acquirers, particularly those in the blue-chip, large-chip pharmaceuticals industry. Many of those firms face patent cliffs over the next several years and they need to replenish their portfolios. In many cases, that objective is most effectively accomplished via acquisitions. That could be good news for SBIO because the ETF is home to an array of potential targets that are affordable, with compelling drugs in the works.
“This symbiotic relationship also benefits the acquisition targets, since the cost of shepherding promising new biotech treatments through the latter stages of clinical trials and bringing them to market is onerous and capital intensive,” added Fidelity. “The acquirer gains a new portfolio of products in development—with the hopes that one or more will become blockbusters. The acquisition target gains resources and support.”
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