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3 Ways Rising Interest Rates Could Affect Healthcare Stocks in 2016

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PPH Dividend Yield (TTM) Chart

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No. 3: Less funding for small cap biotech

Speculative small-cap companies tend to feel the biggest pinch when funding costs increase, and therefore, small-cap clinical-stage biotech may see the pool of funding dry up as small-cap returns come under pressure.

The combination of advances in genetic research that's allowing for big strides in crafting new ways to tackle disease and inexpensive capital has led to a boom in biotech venture capital and IPO activity; however, a recent decline in biotech stocks has led to a slowdown in biotech IPOs, and rising rates could shift venture capital dollars to other investments.

That may already be happening given that CB Insights and KPMG report funding for early-stage companies declined in the third quarter, marking the fourth quarter in a row that funding for young companies has slipped. Instead, more funding is heading to larger companies that may be less risky.

If rising rates lead to fewer new small-cap biotech start-ups, and cause performance headwinds for small cap stocks, then investors will want to spend extra time considering which clinical-stage biotech stocks are truly worth owning in their portfolios.

Historically, small-cap stocks feel the heat from rising interest rates a year after increases start, so 2016 is the time to begin adjusting portfolios to compensate for that risk.

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The article 3 Ways Rising Interest Rates Could Affect Healthcare Stocks in 2016 originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital Markets' clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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