When Will Smaller Biotech Firms Get Their Big Break?

Smaller biotechnology stocks aren’t setting the world on fire this year, but some analysts believe it’s a matter of when, not if, that situation reverses.

Should small biotechnology names get their respective grooves back, the Defiance Nasdaq Junior Biotechnology ETF (IBBJ) is one fund to keep an eye out for.

IBBJ tracks the Nasdaq Junior Biotechnology Index (NBIJR) and the ETF’s components are limited to market values of $5 billion upon inclusion in the fund, putting it in prime position to benefit when market participants embrace biotech names with big return potential.

“It’s a question of when it recovers,” Jason Butler, an analyst at JMP Securities, said in an interview. “Not if it recovers.”

IBBJ is off 13.27% year-to-date and pinpointing when the ETF will rebound is difficult at best, but investors can get some clues from price action amongst large cap biotechnology names.

“For one, gains for biotech stocks have historically been led by the larger companies with the rest of the group following,” reports Carly Wanna for Bloomberg.

Time will tell, but IBBJ may be showing signs of life. On Monday, the fund popped 4.40% on volume that was more than triple the daily average. Plus, it’s a catalyst-rich story.

“And potential catalysts for small-caps exist ahead including positive results in clinical trials and clarity out of Washington on market-moving issues like mergers and acquisitions and drug pricing regulation.” according to Bloomberg.

Biotechnology mergers and acquisitions is an oft-discussed topic, but thus far in 2021, it hasn’t played out in spectacular fashion. That could change, but even it doesn’t, plenty of IBBJ holdings could be credible takeover targets, and the deals wouldn’t be considered “spectacular” by healthcare sector standards.

Plus, IBBJ may have some favorable history on its side. Historical trends show that while there when large cap biotech firms start to pull away from their smaller brethren, the gap tends to be reverse pretty quickly.

“Still, overall gaps between small and large caps historically don’t last long. JMP’s Butler said the successes of the large companies tend to signal that smaller ones are soon to follow suit. During downturns in 2015 and at the end of 2018, larger-cap biotechs led the recovery, followed closely by their smaller counterparts, he said,” continues Bloomberg.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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