The iShares Nasdaq Biotechnology ETF (IBB), the largest biotech-related ETF by assets, closed lower last Friday, but for the week, the fund gained 2%. That could be a sign downtrodden biotech ETFs are poised to bounce back.

A 2% weekly gain for a biotech ETF is by no means, but all recoveries have to start somewhere. The biotech segment and broader healthcare sector have also underperformed the broader market as investors exited positions in response to growing discourse over policy proposals aimed at reducing drug prices in Washington. While some argued that impeachment talks might have drawn politicians’ attention away from the drug pricing issue, scrutiny is unlikely to relieve the pressure.

IBB allocates its holdings based on their market caps, which translates to more valuable names representing more sizable portions of the portfolio. That structure can provide protection in times of volatility, as larger companies can survive better than their smaller, more focused counterparts.

“Perhaps surprisingly, IBB’s recent bullishness has come against the backdrop of political wrangling, a scenario that frequently affects biotechnology and pharmaceutical stocks. Earlier this week, House Democrats passed Speak Nancy Pelosi’ (D-CA) drug pricing legislation, which the Congressional Budget Office (CBO) estimates would save Medicare $345 billion annually from 2023 through 2029,” reports Nasdaq.

Biotech Stocks Due For Rapid Appreciation

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.

“Morningstar’s analysis points to pharma and biotech as the most undervalued industries in the healthcare sector, in large part because of continued overhang from U.S. drug pricing reforms coming out of Washington,” said the research firm in a recent note.

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 of struggles for biotechnology names, some analysts see value with some big-name biotech stocks.

“IBB currently trades at 21x earnings. That’s a premium to the broader market, something biotechnology stocks usually sport, but by the fund’s historical standards, IBB actually looks attractive here,” according to Nasdaq.

For more information on the healthcare segment, visit our healthcare category.

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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