Why Now Is the Time to Pile Back Into Biotech Stocks (IBB, XBI)

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Biotech stocks — which had been on the sort of sustained multiyear tear you rarely see in the stock market today — have gotten absolutely clobbered in the last three months.

Why Now Is the Time to Pile Back Into Biotech Stocks (IBB, XBI)

Two prominent exchange-traded funds in particular, the iShares Nasdaq Biotechnology Index ETF (IBB) and the SPDR S&P Biotech ETF (XBI) have felt the brunt of the pain, suffering 3-month declines of 21% and 27%, respectively.

The source of much of the pain for IBB and XBI has actually been none other than Hillary Clinton, who recently came out guns blazing against the “price gouging” seen in specialty treatments and so-called orphan drugs today. The plan she unveiled in response to the price gouging did no favors for biotech stocks.

While Clinton may indeed have a point with respect to the particular case that caught her ire — Turing Pharmaceutical’s now-infamous price hike on an AIDS and cancer drug from $13.50 per pill to $750 per pill — there are some potent reasons why you shouldn’t be spooked out of biotech stocks, or ETFs like XBI and IBB, going forward:

Clinton’s Plan Is Unrealistic

Firstly, I should say that politics can most certainly affect the investing landscape, particularly when it comes to healthcare and biotech stocks — and therefore biotech ETFs like XBI and IBB.

For examples, a letter sent to Gilead Sciences, Inc. (GILD) by three members of Congress questioning the $84,000 price tag on Hepatitis C treatment Sovaldi sent biotech stocks into a tailspin in early 2014.

The same thing is happening to biotech stocks today, but this time Hillary Clinton is the catalyst. The issue? Her plan to cap out-of-pocket costs, increase competition and bring in overseas treatments is somewhat unlikely to go through. After all, only 12% of biotech companies are profitable, with the industry relying heavily on R&D spending to fuel medical innovations and future growth.

Simply put: There need to be strong economic incentives in place for biotechs to continue developing innovative drugs that solve or treat critical health problems. You can be sure IBB and XBI would take a hit if Clinton’s plan went through, but the likelihood of that happening just isn’t that high.

What Makes IBB and XBI Special?

IBB and XBI are unique because they’re both well-respected, well-diversified ETFs that give investors exposure to biotech stocks — something you’re not likely to get in a personal portfolio with two or three biotechs.

Let’s start with XBI, the more diversified of the two offerings. It currently holds 101 different stocks, none of which accounts for more than 1.4% of its total portfolio. Its top 10 holdings — Five Prime Therapeutics (FPRX) and Orexigen Therapeutics (OREX) being its two most prominent at the moment — make up less than 13% of XBI’s entire portfolio.

Basically, XBI invests in high-risk, high-reward biotech stocks; but it does so with a lot of them, so if one implodes, the whole portfolio isn’t too bothered by it.

While IBB is also diversified with 144 different biotech stocks under its umbrella, don’t be fooled by the higher number of holdings. It is, without a doubt, far less diversified than XBI.

In sharp contrast to XBI, IBB’s top 10 holdings account for a whopping 60% of its entire portfolio. If one of those bad boys goes under, IBB would be seriously impaired.

Thankfully, IBB is smart about which biotech stocks it overweights: It goes heavy into the large- and mega-cap names names, with its top five holdings currently Amgen (AMGN), Celgene (CELG), Regeneron (REGN), Gilead and Biogen (BIIB), each of which is worth between $50 billion and $150 billion.

I doubt biotech stocks will remain depressed for much longer. No meaningful changes in pricing are likely to take effect anytime soon, and many of these stocks are already coming off their recent lows. With IBB and XBI unlikely to get much cheaper anytime soon, now’s as good a time as any to get behind them.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/biotech-stocks-ibb-xbi/.

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