ETF Trends CEO Tom Lydon discussed the Virtus LifeSci Biotech Clinical Trials ETF (BBC) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.

BBC seeks investment results that correspond to the performance of the BioShares Biotechnology Clinical Trials Index. Clinical Trials stage companies are typically younger, smaller companies which do not have a drug approved, but instead focus on testing their experimental drugs.

The area of early-stage biotech tends to attract people because of the potentially huge returns. However, the otherside of this falls on biotech and pharma not having much in the way of big profits as of late. Yet, Lydon has his reasons for wanting to spotlight BBC ETF.

As he explains, biotech is an area that’s going to continue to do well over time, like technology. That said, people don’t know a lot about these companies or what they have in the pipeline regarding their technology, drug lines, etc. BBC is different.

“This ETF, as you can see just by the name, focuses on clinical trials, and clinical trials are what’s needed in order to get a drug or a technology to market,” Lydon states. “What we really liked about this is that it has a certain discipline around how these companies are actually involved in the ETF themselves.”

As an example, Lydon explains how clinical trials have various phases. Phase 1 is related to safety and dosage control, where around 70% are generally able to make it through. Phase 2 focuses on side effects and what adverse effects there may be. About a third of those move through to stages beyond, which take into consideration other factors.

Looking through that pipeline and diving into the whole idea surrounding what companies are bringing drugs to market through this process and what companies have a good chance at getting them through on the other side in the marketplace, it would then come down to investing in more profitable companies.

You Gotta Start Small

Most of these are small companies too. A lot of them are micro or small-cap companies, which can mean the information is sometimes limited. It’s why having a large company at the top that can do the research helps out tremendously.

“It’s a growing area that’s not going away. This ETF, even though the S&P is up over 25% YTD, is up over 35% YTD. So, even though some areas in healthcare and biotech have waned, this ETF has done really well.”

When asked if it’s a 200-day moving average play, Lydon notes how it plays similar to other thematic strategies in that many makes sense for a long term, and if investors tend to focus that way, it could be wise to take a small slice for the portfolio, knowing it will pay off in 5-10 years.

On the other hand, if there’s a concern for market volatility or that the current bull market may come to an end in the next few years, then yes, a 200-day play would work just fine. As BBC is part of its own thinly sliced sector of the market place, it’s not always going to correlate well with the other parts of the market.

“If you’ve got some cash on the sideline and you’re looking for an uptrend, this is something surely in place,” Lydon adds. “The other thing is if you’ve got younger people with the idea that getting them educated about opportunities in the future, as mentioned, some of these companies are not well known, so having someone to help educate about investing and opportunities for the future, out of these micro or small-cap companies are going to come to some companies that are going to be well-known by 5-10 years from now.”

Particularly for investors with a longer timeline, it would be great to help people they care about to invest in something that can grow with them over time.

Listen to Tom Lydon Talk About the BBC ETF:

For more podcast episodes featuring Tom Lydon, visit our podcasts category.