U.S. stocks have moved in fits and starts through the first quarter of 2018, but growth and momentum stocks continue rewarding investors who can handle the gyrations associated with higher-beta investment factors.
In addition to technology and internet stocks, growth areas that have been solid to start 2018 include biotechnology exchange-traded funds (ETFs) such as the ALPS Medical Breakthroughs ETF (NYSEARCA:SBIO). Consider this: as of March 26, the S&P 500 was down 0.3% year-to-date while the Nasdaq-100 Index was higher by 5.7%, but the ALPS Medical Breakthroughs ETF was higher by 7.3%.
That is some validation for my pick, revealed in early January, for SBIO to rank as one of this year’s best ETFs. SBIO is outpacing the Nasdaq Biotechnology Index by 600 basis points with the first quarter drawing to a close.
This biotech ETF has performed inline with the S&P Biotechnology Select Industry Index to start 2018, but SBIO has been significantly less volatile than that benchmark, implying superior risk-adjusted returns.
Catalysts Abound for SBIO
As was highlighted back in January, one of the primary reasons to consider SBIO this year is because this biotech ETF is chock full of potential takeover targets and large-cap pharmaceuticals and biotechnology companies are flush with repatriated cash following the tax reform legislation passed late last year.
SBIO is home to 95 stocks and, no, not all of the fund’s constituents will be acquired. Still, this biotech ETF is home to multiple legitimate takeover targets. Jefferies recently highlighted a slew of smaller biotech companies that are credible acquisition targets, several of which reside in SBIO.
Jefferies analyst Steven DeSanctis notes “that the premiums paid for small- and mid-cap biotech are far better than those in other sectors, and even other healthcare stocks,” reports Barron’s.
That point is relevant to SBIO investors because the fund only holds biotech stocks with market values of $200 million to $5 billion, ensuring it stays in the mid- and small-caps spectrums. SBIO components are not only attractive acquisition ideas because of their lower market values, but also because the Poliwogg Medical Breakthroughs Index, SBIO’s index, mandates that member firms have at least one drug or therapy in Phase II or Phase III Food & Drug Administration (FDA) trials.
With drugs that far along in the approval process, the risks to acquiring companies are reduced. That is an important factor to consider when many old guard pharmaceutical companies are contending with generic competition and stale new product pipelines.
Investors Are Noticing
When we highlighted SBIO in January, the ETF had $143.5 million in assets under management. That figure has grown to $181.4 million as of March 26.
Another factor to consider as we move out of the first quarter, the broader healthcare sector’s period of seasonal strength, historically, starts in late April and lasts until late in the year. That could be a sign the best is yet to come for SBIO in 2018.
As of this writing, Karl Utermohlen did not hold a position in any of the aforementioned securities.