Following a multiyear run of disappointment, biotech stocks and related ETFs are showing signs of life. For the past 90 days ending February 29, the widely observed Nasdaq Biotechnology Index was higher by almost 17%.
That implies the Invesco Nasdaq Biotechnology ETF (IBBQ), which follows that Nasdaq gauge, could be among the ETFs ready to deliver improved performance. Home to 222 stocks, IBBQ offers investors one of the deepest benches among all biotech ETFs. That indicates the fund could benefit from renewed enthusiasm for multiple corners of the biotech market.
IBBQ’s depth is relevant, because after a surprisingly long slump, biotech stock could benefit from multiple tailwinds this year. That could potentially renew the moribund group’s status as a favored destination for growth-oriented healthcare investors.
Bet on Biotech Rebound With IBBQ
While IBBQ’s underlying benchmark and the fund itself have delivered impressive returns in recent months. But investors who missed out on those gains need not fret. That’s because some market observers believe the biotech resurgence is just getting started.
“Months ago, the incipient biotech rally seemed largely based on expectations that 2024 would bring lower interest [rates. It] came alongside surges in other small-cap indexes. But in recent weeks, much of the strength appears to have been sector-specific. Investors are once again turning toward [biotech. They are] intrigued by promising medical-trial data, and anticipation that big pharmaceutical companies will snap up smaller players they think could improve their pipelines of new drugs,” reported Josh Nathan-Kazis for Barron’s.
As was on display for most of last year and all of 2022, biotech equities are indeed rate-sensitive. That makes sense because many of these companies need large amounts of capital to fund research and development efforts. Additionally, many smaller biotech companies aren’t yet profitable. That’s a trait that’s almost always a drag when rates rise.
Fortunately, many of the more financially sturdy biotech companies and some with drugs in late-stage trials have been able to access to capital. That, coupled with inklings that the industry’s IPO)market is improving, could be positive signs for assets such as IBBQ.
“Investor interest in biotech initial public offerings has been nonexistent for years, after a glut of deals during the pandemic soured the market. But early 2024 has seen a handful of biotech IPOs, and the first, an offering by CG Oncology in late January, jumped 96% on the first day of trading,” added Nathan-Kazis.
Plus, IBBQ offers the luxury of a low expense ratio of just 0.19% per year, indicating risk-tolerant investors can afford to be patient with the fund.
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