Best ETFs for 2018: Break Through With the ALPS Medical Breakthroughs ETF

This article is a part of InvestorPlace’s Best ETFs for 2018 contest. Todd Shriber’s pick for the contest is the ALPS Medical Breakthroughs ETF (NYSEARCA:SBIO).

Yes, it is 2018, but quickly, let’s recall one of the more notable items among U.S. stocks from 2016 — that being the healthcare sector notching its first annual negative performance since 2008. Slumping biotechnology stocks were a big reason why the healthcare sector slid in 2016.

Best ETFs for 2018: Break Through With the ALPS Medical Breakthroughs ETF

Fortunately, that theme was not persistent. Healthcare, the third-largest sector weight in the S&P 500, rebounded in 2017 as the Nasdaq Biotechnology Index gained 21.1%.

The Nasdaq Biotechnology Index is a widely followed metric of biotech stocks in part because it is heavy on the industry’s biggest names. Think Celegene Corporation (NASDAQ:CELG), Amgen, Inc. (NASDAQ:AMGN) and related fare.

Some of the largest biotech exchange-traded funds (ETFs) on the market today are, not surprisingly, heavily allocated to stocks like Amgen and Celgene. There is nothing wrong with that, as these funds have, broadly speaking, delivered stellar long-term returns. However, the jaw-dropping gains in the biotechnology space are often delivered by stocks many investors have not heard of.

The rub there is it is difficult even for some professional investors to successfully pick a stock in the world of mid- and small-cap biotech companies. The ALPS Medical Breakthroughs ETF (NYSEARCA:SBIO) eases that burden.

How SBIO Works

SBIO “invests in stocks of mid-cap and small-cap companies with a market capitalization of no less than $200 million and no more than $5 billion. It seeks to replicate the performance of the Poliwogg Medical Breakthroughs Index, by investing in the stocks of companies as per their weightings in the index,” according to ALPS.

There are some compelling elements to SBIO’s methodology. Knowing that it is clinical trials that make or break mid- and small-cap biotech and pharmaceuticals companies, it is potentially rewarding that SBIO member firms must have at least one drug currently in Stage II or Stage III Food & Drug Administration (FDA) trials.

Simply picking random stocks that fit that criteria can lead investors to companies with cash problems. To that end, SBIO components must have enough cash on hand to last 24 months at the current burn rate. When SBIO’s index rebalances, it limits individual holdings to a weight of 4.5%, meaning that if a clinical trial goes awry for one of the ETF’s largest holdings, punishment to investors in the fund would be relatively contained.

The SBIO Opportunity

“Biotechnology is a particularly difficult and challenging industry for stock pickers, making a diversified, index based investment a viable alternative for investors seeking access to the space,” notes ALPS.

Yes, SBIO is coming off a year in which gained 45.6%, outperforming the Nasdaq Biotechnology Index by a better than 2-to-1 margin. That does not mean the ETF can’t offer a sequel in 2018. In fact, risk-tolerant investors may want to consider SBIO right here, right now, as January usually features some of the biotechnology industry’s most important conferences. Those events could bring positive (or negative) catalysts for SBIO holdings.

SBIO, which turned three years old in December, has $143.5 million in assets under management. Investors have already added $3.3 million to the fund this year.

As of this writing, Todd Shriber did not own any of the aforementioned securities.

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