It has been eventful first half of 2018 for broader domestic and international equity indexes. Rising Treasury yields and fears of trade wars with the likes of China are hampering U.S. stocks.
Underscoring that point, as of Jun. 28, the S&P 500 is up less than 2% year-to-date. Also just four of the 11 sectors tracked in the benchmark U.S. equity gauge are positive on the year. Albeit modestly, healthcare is one of the four sectors higher YTD, and biotechnology stocks are a big reason.
Enter the ALPS Medical Breakthroughs ETF, my pick for the InvestorPlace Best ETF of 2018 competition.
A Nice Second Quarter
Through Jun. 28, SBIO is sporting a second quarter gain of 11.9%, more than double the 5.4% returned by the large-cap-heavy Nasdaq Biotechnology Index over the same period. Taking a broad view, one of the reasons SBIO is outperforming large-cap biotech indexes and the broader market is its tilt toward mid- and small-cap stocks.
SBIO only holds companies with market values ranging from $200 million to $5 billion, an obvious advantage at a time when small caps are rallying. Among the reasons that small caps are hot are lack of sensitivity to rising interest rates, lack of vulnerability to the stronger dollar and a focus on the domestic economy.
All of those points are relevant to SBIO, particularly when acknowledging that the fund’s underlying index only includes companies with enough cash to survive at least 24 months at current burn rates. That says SBIO member firms, in many cases, do not need to tap corporate debt markets at a time when financing costs are increasing because of Federal Reserve tightening.
None of SBIO’s 115 holdings account for more than 3.45% of the exchange traded fund (ETF). That helps limit single stock risk without sacrificing responsiveness to positive biotech headlines. During the second quarter, SBIO benefited from positive headlines.
Although the stock slid late in June, GW Pharmaceuticals (NASDAQ:GWPH) impressed for most of the quarter. In late June, the Food & Drug Administration (FDA) approved GW’s anti-seizure drug Epidiolex.
InvestorPlace reported last month that “the government approval for Epidiolex, which aims at treating seizure disorders called Lennox-Gastaut syndrome and Dravet syndrome, is a net positive.” But because the treatment includes cannabidiol (CBD), the Drug Enforcement Agency (DEA) has to approve sales.
Shares of GW now trade well below the average analyst price target, indicating there could be upside. The stock is 2.34% of SBIO’s weight as of Jun. 28.
Another example of a second quarter SBIO star is Madrigal Pharmaceuticals (NASDAQ:MDGL). The stock saw some profit-taking in late June, but that is to be expected when a stock enters the final trading day of a month with an intra-month gain of over 150%.
In a single trading day in early June, Madrigal cobbled together the bulk of its monthly gains, more than doubling after revealing positive Phase II clinical trial results for its treatment of nonalcoholic steatohepatitis, or NASH.
The stock rallied later in the month on news Madrigal may be exploring a sale, a logical move given the potentially lucrative nature of the NASH market and the desire for large-cap biotechnology and pharmaceuticals companies to gain easy access to that arena.
Madrigal is 2.65% of SBIO’s weight as of Jun. 28.
GW and Madrigal are just two examples of SBIO’s potency, but they highlight the fund’s leverage to FDA approvals and mergers and acquisitions news, two themes that should continue in the second half of 2018.