The coronavirus outbreak is prompting investors to visit the healthcare sector, a trend that could benefit ETFs, including the SPDR S&P Biotech ETF (NYSEArca: XBI).
XBI, one of the largest biotechnology ETFs by assets, uses an equal-weight methodology, meaning it tilts toward smaller companies, but not at the expense of exposure to some of the industry’s larger players. In both cases, the fund offers above-average exposure to potential COVID-19 treatments and vaccines.
As has recently been documented, antiviral treatments could prove vital in fighting the coronavirus.
“Antiviral treatments have been the first line of defense against COVID-19, as they can reduce the intensity and duration of the infection,” said State Street Chief Investment Officer Daniel Farley in a recent note. “However, they are neither a cure nor prevention, and it is not known if antivirals work effectively on all segments of the population. Phase 3 clinical studies have begun on Gilead Sciences’ Remdesivir, which was originally developed to treat Ebola. Initial trial results should be available by the end of April.”
Examining XBI
When investors are looking for more aggressive rates of growth, biotech stocks typically represent some of the best opportunities for rapid appreciation. These companies spend a plethora of time and massive amounts of money to fund breakthrough biological treatments and diagnostic tools. Blossoming developments can literally change their fortunes, and the fortunes of shareholders overnight.
Novel vaccines are another area XBI provides exposure to and that’s a potentially important front in the war against COVID-19. Moderna is developing several vaccines to cure respiratory syndromes and flu. The company is now working to develop a vaccine for the coronavirus.
“The leading candidate in the US is the mRNA vaccine from Moderna, and a healthy volunteer study began in March,” notes Farley. “This approach, which uses a piece of COVID-19’s genetic code, or messenger RNA, has not been previously approved by the FDA, and safety issues are a concern. Moderna has the most optimistic timeline, with the possibility of dosages available for frontline health care workers by Q4 2020 and broader distribution available by Q1 2021.”
Healthcare stocks are also showing attractive valuations relative to other defensive sectors, which are richly valued. Biotechnology historically trades at multiples that are elevated relative to broader benchmarks, but after last year’s struggles for biotechnology names, some analysts see value with some big-name biotech stocks.
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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.
