After slumping last year, biotechnology stocks and the related exchange traded funds (ETFs) are on the mend in 2019. Last year, the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), the largest biotech ETF by assets, slipped 9.5%.
With almost two months of 2019 in the books, IBB has recouped all of those losses and then some as the benchmark biotechnology ETF is higher by nearly 17% this year. Amid ongoing industry consolidation, attractive valuations for a group that is often richly valued and a strong broad market, catalysts are in place for more upside for biotechnology ETFs.
Jefferies analyst Michael Yee “writes that third-party data shows that the fourth quarter saw not only the biggest actively managed fund outflows in the biopharma space in 15 years, but outflows that were double the biotech bear market of 2016,” according to Barron’s.
Still, flows data suggest investors need some convincing about returning to biotechnology ETFs. Year-to-date, IBB has lost $382.28 million in assets.
Those outflows should convince investors to shy away from biotechnology ETFs. Here are some fine ideas among biotech ETFs to consider right here, right now.
ALPS Medical Breakthroughs ETF (SBIO)
Expense Ratio: 0.5% per year, or $50 on a $10,000 investment.
For investors willing to take some more risk due to the fund’s mid- and small-cap composition, the ALPS Medical Breakthroughs ETF (NYSEARCA:SBIO) is one of the best alternatives to traditional biotech ETFs. SBIO member firms have market values ranging from $200 million to $5 billion.
That puts the fund at the epicenter of some prominent biotech themes. SBIO is not designed to be a takeover fund, but with market caps that do not exceed $5 billion when the fund rebalances, SBIO components have frequently been mentioned as takeover targets or outright acquired in the fund’s four-plus years on the market.
Second, smaller biotech companies are often more sensitive to positive trial news than large-cap counterparts, which is relevant to SBIO because the fund only holds companies with drugs or treatments in Phase II of Phase III clinical trials.
Invesco Dynamic Biotechnology & Genome ETF (PBE)
Expense Ratio: 0.59%
The Invesco Dynamic Biotechnology & Genome ETF (NYSEARCA:PBE) is a biotech ETF to consider for investors looking for a unique weighting methodology. This $281.4 million fund follows the Dynamic Biotech & Genome Intellidex Index.
“The Intellidex Index is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action, and value,” according to Invesco.
Over the past three years, this biotech ETF has handily outperformed IBB, and much of that out-performance is attributable to the size factor. Currently, over 70% of PBE’s 29 holdings are classified as mid- or small-cap stocks.
Invesco S&P SmallCap Health Care ETF (PSCH)
Expense Ratio: 0.29%
Small-cap ETFs can offer big returns, and for investors willing to get tactical, some sector funds in this space can really pack a punch. That group certainly includes the Invesco S&P SmallCap Health Care ETF(NASDAQ:PSCH).
As its name implies, PSCH is a broader healthcare fund, not a dedicated biotech ETF, but the combination of healthcare and small-cap stocks often means significant biotechnology exposure. PSCH obliges with a 19.46% to biotechnology stocks. Not surprisingly, PSCH is predominantly a small-cap growth fund as about 72% of its 69 holdings are classified as small-cap growth stocks.
Since inception nearly nine years ago, PSCH has beaten the S&P SmallCap 600 Index by more than 700 basis points.
Global X Longevity Thematic ETF (LNGR)
Expense Ratio: 0.5%
The Global X Longevity Thematic ETF (NASDAQ:LNGR) is a thematic fund focusing on the issue of rapidly aging populations in some of the world’s largest economies. Via that focus, LNGR has some credibility as a biotechnology ETF as biotech stocks represent around a third of the fund’s weight.
While LNGR is a highly focused fund and still small in terms of assets, there are compelling long-term trends backing its investment thesis.
“As more people age, there will simply be greater demand for treatments, both old and new, to prevent, mitigate and ideally cure such diseases,” according to Global X research. “Innovations in technology and biotech research, including the use of genomic data and bioinformatics for personalized care, can offer further solutions in this space.”
ARK Genomic Revolution ETF (ARKG)
Expense Ratio: 0.75%
The actively managed ARK Genomic Revolution ETF (NYSEARCA:ARKG) is not a biotechnology ETF, but it focuses on some of the most compelling healthcare opportunities, including bioinformatics, CRISPR, molecular diagnostics, stem cell therapies and more.
“Companies within ARKG are focused on and are expected to substantially benefit from extending and enhancing the quality of human and other life by incorporating technological and scientific developments and advancements in genomics into their business,” according to ARK Investment Management.
The $254 million ARKG usually holds 30 to 50 stocks and the current weighted average market value of its holdings is $30 billion. While ARKG is pricier than traditional healthcare and biotech ETFs, the fund is worth the higher fee. Over the past three years, ARKG is up 91.3%, nearly doubling the returns of the S&P 500 Health Care Index.
First Trust NYSE Arca Biotechnology Index Fund (FBT)
The First Trust NYSE Arca Biotechnology Index Fund (NYSEARCA:FBT) is one of the largest and more traditional biotech ETFs. Home to 30 stocks, FBT follows the NYSE Arca Biotechnology Index.
Although FBT appears to be a basic big pharma ETF, none of its holdings exceed weights of 3.94% and the size factor is at play with this fund as highlighted by a median market capitalization of $8.18 billion for its holdings.
Tilting toward small biotech stocks has helped FBT top the largest cap-weighted biotech ETF by a margin of better than 2-to-1 over the past 36 months. During that span, FBT has only been slightly more volatile than its cap-weighted rival.
Principal Healthcare Innovators Index ETF (BTEC)
Expense Ratio: 0.42%
The Principal Healthcare Innovators Index ETF (NASDAQ:BTEC), which debuted in August 2016, is another example of a thematic approach to healthcare investing. BTEC tracks the Nasdaq U.S. Healthcare Innovators Index, which is comprised of early stage, small-cap names.
“These are primarily biotechnology and life science, which have the potential to create cures for cancer, develop new medical technologies, or spearhead other medical advances,” according to ETF Trends.
BTEC is not a pure biotech ETF, but at the end of last year, 60.57% of the fund’s weight was allocated to biotech stocks. When BTEC rebalances none of its holdings exceed weights of 3% and at the end of 2018, the fund’s top 10 holdings represented just over 29% of its weight. Those are two traits that help diminish concentration risk.
As of this writing, Todd Shriber did not own any of the aforementioned securities.