The ALPS Medical Breakthroughs ETF (NYSEArca: SBIO) was a star performer among healthcare ETFs last year and with small- and mid-cap members of that sector looking poised to renew bullish trends this year, SBIO could again deliver for investors.

SBIO focuses on small- and mid-cap companies that have one or more drugs in either Phase II or Phase III trials. The component holdings have one or more drugs in either Phase II or Phase III U.S. Food and Drug Administration clinical trials. In a Phase II trial, the drug is administered to a group of 100-300 people to see if it is effective and to evaluate its safety. In a Phase III trial, the drug is given to a larger group, between 500-3,000 people, to confirm its effectiveness, monitor side effects, compare it to commonly used treatments and collect information that will allow the drug or treatment to be used safely.

Fast-growing companies have been outperforming their value-styled peers, or companies described as trading at a low multiple of their book value. The growth category has pushed ahead of value through much of the decade-long bull rally, and it continues to hold true in 2020, with the S&P 500 and S&P Small Cap 600 growth indices outshining their value counterparts.

SBIO Star Status

“History shows that mid- and small-cap biotechnology companies can deliver significant upside when they deliver positive FDA trial news. Likewise, if the news is bad, those stocks typically plunge, forcing investors to assess the company’s cash position,” reports InvestorPlace. “No fund can completely eliminate those risks, but SBIO mandates that member firms have enough cash to survive at least 24 months at current burn rates.”

Small-caps tend to have more room to run or grow, compared to larger companies, especially in areas like biotechnology and pharmaceuticals where smaller companies can come out with breakout innovative medicines that can generate huge growth. These smaller companies are also potential acquisition targets for larger companies seeking to diversify their product lines.

“Another perk of SBIO is that its combination of companies with somewhat decent balance sheets, drugs in Phase II or III trials and a component market value capped at $5 billion is that those traits make SBIO holdings attractive as takeover targets to larger companies,” according to InvestorPlace.

For more on thematic ETFs, please visit our Thematic Investing Channel.

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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