ETF Trends CEO Tom Lydon discussed the Defiance Nasdaq Junior Biotechnology ETF (IBBJ) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
IBBJ covers companies around the globe that are focused on various areas within the biotech or pharmaceuticals space. Included companies are those involved in genomics, DNA technology, genetic engineering, and molecular biology, as well as pharmaceutical manufacturers of prescription or over-the-counter drugs. Its emphasis on pharmaceuticals makes IBBJ to differ from some peer funds and its segment benchmark. The underlying index concentrates its exposure to approximately 200 small-cap stocks that are exclusively listed on the NASDAQ Stock Market. Stocks selected must meet certain size and liquidity requirements. The index is market-cap weighted with an 8% single security cap for five securities, and the excess is allocated proportionally across the rest. The index’s rebalance, and reconstitution occurs semi-annually.
Targeted exposure to junior disruptors in the biotechnology space as drugmakers focus on specialized or targeted drug applications. The play on innovations comes out of smaller companies. That also means there’s a play on potential increased merger & acquisition activity. As big blockbuster drugs see patents expire, many big-named companies are now looking for merger/acquisition targets through smaller specialty drugmakers.
Why Junior Biotechs?
Junior biotech companies, with a market capitalization that is less than $5 billion, have the potential advantage of a Food and Drug Administration more receptive to new cutting-edge and rare-disease therapies. They are possibly also strengthened by increased patient lobbying and a greater willingness by insurers to pay for treatments. Combined with the potential for mergers-and-acquisitions and the U.S. government’s recent gigantic Covid-19 aid to small and mid-sized companies, small-caps seemed likely to lead the domestic recovery.
As far as government support, the Dovish Federal Reserve provides cheap loans for small businesses. The U.S. government’s gigantic Covid-19 aid package for small- and mid-sized companies was also there. Plus, the U.S. government has been throwing out billions of dollars for “Operation Warp Speed” to fund Covid-19 vaccine research.
The value of the global pharmaceutical market rose from about $390 billion in 2001 to about $1.25 trillion at the end of 2019. Research and development expenditures in this industry grew to $179 billion by 2018 from $129 billion in 2010. The industry has experienced a 3% compound annual growth rate since 2014.
Whether for cancer research, or a vaccine or treatment for Covid-19, the strong demand side continues to combine with government regulation and policies prioritizing these sectors. In uncertain and unpredictable times, biotechnology benchmarks have been known to beat the wider market.
Listen to the full podcast episode on IBBJ ETF:
For more podcast episodes featuring Tom Lydon, visit our podcasts category.