The SPDR S&P Biotech (ETF) (NYSEARCA:XBI) and a host of biotech stocks and funds are surging this morning – and that makes them stick out like a sore thumb.
But it doesn’t mean Wall Street has lost its mind.
Over the past year or so, biotech stocks and ETFs like XBI and the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) have been rocked by double digits, most of it sparked by a single tweet from Hillary Clinton in September 2015:
“Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on. –H”
Hillary’s tweet had to do with Turing Pharmaceuticals, which was under the microscope for rocketing the price of parasitic infection treatment Daraprim by some 5,500%, to $750.
The message: Biotech stocks won’t be able to execute that kind of price gouging forever.
Washington has followed up since then, too. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) came under federal scrutiny in April for aggressively hiking prices on its treatments. Mylan NV (NASDAQ:MYL) came next, having to answer to angry questions from D.C. after reports pointed out that EpiPen prices had rocketed 400% since 2008 with no significant improvements to the treatment.
That rocked those individual names, but XBI has been a victim as a result. XBI was almost halved between July 2015 and February 2016, with the lion’s share of those losses coming in the wake of Hillary’s tweets.
Biotechs looked increasingly shaky over the past month or so as a Hillary Clinton presidency looked like a lock.
With Donald Trump coming into office, all bets are off.
Why the XBI?
The XBI is a biotech-focused ETF that currently holds 85 stocks within the industry. What makes it stand out, though is that it’s an equal-weighed fund, rather than a cap-weighted fund. In fact, it’s maybe my favorite trait.
In short, in a cap-weighted fund, larger stocks make up more of the portfolio — in an equal-weighted fund, the holdings are rebalanced on a regular basis to hold the exact same weight as one another. This means from large to small, all holdings should have an equal amount of say in how the fund performs.
Specifically, this means that unlike IBB, which is overweight in larger, slower-growth biotechs, you get to harness a lot more potential from smaller, “growthier” biotechs — albeit more volatile ones.
However, mergers & acquisitions are the friend of the XBI, as buyouts pop the value of their holdings, which then exit the fund, leaving room for a new biotech with explosive potential. It’s the “virtuous cycle of biotech stocks,” so to speak.
Top holdings at the moment include Sarepta Therapeutics Inc (NASDAQ:SRPT) and Tesaro Inc (NASDAQ:TSRO) — not tiny biotechs, but also not the biggest names in the space.
Also, XBI charges just 0.35%, or $35 annually on every $10,000 invested. It’s not the cheapest ETF on the market, but it’s plenty cheap for the space that XBI covers.
Bottom Line on Biotech Stocks
Biotechs bubbled up in 2015, and frankly, they were due for a haircut after years of rip-roaring gains. XBI had put up gains well north of 300% for the five years before it peaked in July — about triple the S&P 500 in that time. But now, most of the froth is gone.
Biotech stocks remain one of the best ways to play the aging of the baby boomers and the increasingly profitable healthcare space. People are throwing ever-larger sums of money for life-saving or at least life-bettering treatments. These companies were going to see ample profits one way or another — but Trump entering the White House has given investors confidence that they’ll be able to take a little more than they might’ve been able to under Clinton.
XBI is one of the best plays in the space. It’s riding higher today on sentiment, but it’s a long-term winner for far more reasons than that.
Kyle Woodley is the Managing Editor of InvestorPlace.com. As of this writing, he was long XBI. Follow him on Twitter at @KyleWoodley.
