The healthcare sector is struggling this year. In 2018, the group was the best-performing sector in the S&P 500. This year, it’s the worst. The Dow Jones U.S. Health Care Index is up just 10.20% year-to-date, but there are some pockets of strength and potential growth opportunities in the S&P 500’s third-largest sector weight.
Biotechnology is one of those groups. Some biotech ETFs aren’t setting the market ablaze this year, but broadly speaking, biotech ETFs are outperforming diversified healthcare funds. For example, the iShares Nasdaq Biotechnology ETF (NASDAQ:), the largest biotech ETF by assets, is up almost 10% year-to-date.
The current market environment, marked by lower interest rates and , could actually favor biotech ETFs due to the groups’ emphasis on the U.S. economy. Plus, the broader healthcare sector looks inexpensive relative to other defensive sectors.
“Health care, the worst-performing sector this year, trades at 15 times forward earnings, below the 17 times multiple on the S&P 500. By comparison, staples, utilities and REITs trade closer to 20 times earnings,” .
Here are some biotech ETFs to consider right here, right now.
SPDR S&P Biotech ETF (XBI)
Expense ratio: 0.35% per year, or $35 on a $10,000 investment.
The SPDR S&P Biotech ETF (NYSEARCA:) is home to $4.15 billion in assets under management, making it one of the largest biotech ETFs, but XBI’s size is not why it is being highlighted here. For active traders, XBI is worth a look right now because during the week starting Monday, Aug 5, half of XBI’s 119 holdings report earnings, so there are plenty of catalysts that could move this fund in the near term.
XBI is an equal weight ETF and as such tilts toward smaller biotech names as highlighted by an average market value of $10.6 billion for the fund’s components, putting it in mid-cap territory. XBI status as an imminent earnings play is relevant because FactSet expects second-quarter earnings for the healthcare sector to rise an average of 2.1%, the second-best growth rate among the 11 S&P 500 sectors.
What could be a challenge for XBI and other biotech ETFs over the near term is campaign-trail chatter about drug prices (many XBI components are considered pharmaceuticals makers), but in the fund’s corner are decent valuations and status of many of its holdings as credible takeover targets.
Invesco Dynamic Biotechnology & Genome ETF (PBE)
Expense ratio: 0.59%
The Invesco Dynamic Biotechnology & Genome ETF (NYSEARCA:) is an ideal biotech ETF for investors looking for a smart beta approach to the space. PBE, which turned 14 years old in June, tracks the Dynamic Biotech & Genome Intellidex Index.
That benchmark “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,” .
Smart beta is not always perfect, but its applications in the biotech ETF space are notable. Over the past three years, PBE has beaten a major cap-weighted index of biotechnology stocks by a margin of better than 3-to-1 with only slightly higher volatility.
ALPS Medical Breakthroughs ETF (SBIO)
Expense ratio: 0.50% per year
The ALPS Medical Breakthroughs ETF (NYSEARCA:) has long been a unique alternative to traditional biotech ETFs and with its emphasis on small-cap and smaller mid-cap stocks, SBIO can also be an alternative for risk-tolerant investors looking to replace standard small equity exposure.
In addition to capping components’ market values at the time of entry at $5 billion, SBIO’s underlying index requires that those companies have at least one drug or therapy in Phase II or III Food and Drug Administration (FDA) trials. So while there can be no guarantees that SBIO holdings will become the next Amgen or Gilead, at least investors know the fund is not chock full of financially flimsy fly-by-night biotech stocks.
And speaking of finances, SBIO components must have enough cash to survive at least two years to be included in the fund. That’s a stiffer requirement than is found on standard small-cap ETFs, perhaps explaining why over the past three years SBIO is not just one of the , but one of the best small-cap funds, too.
Global X Genomics & Biotechnology ETF (GNOM)
Expense ratio: 0.68%
Having debuted in April, the Global X Genomics & Biotechnology ETF (NASDAQ:) is one of the newest biotech ETFs on the market. Rookie status aside, this Global X fund addresses a compelling, fast-growing corner of the healthcare market.
“There are several segments within the genomics field that stand to benefit from falling genetic testing costs, the rise of precision medicine ever-increasing amounts of genetic data, and other trends fueling genomics’ disruption of health care,” .
As an industry, genomics is not nearly as old some other healthcare groups, but the upside of that is that the industry offers plenty of growth potential via areas such as gene sequencing, gene editing, computational genomics and genetic diagnostics and more. Home to 40 stocks, a decent-sized lineup for a niche ETF like this, GNOM touches many of the exciting corners of the genomics investment thesis.
ROBO Global Healthcare Technology and Innovation ETF (HTEC)
Expense ratio: 0.68%
Having debuted in late June, the ROBO Global Healthcare Technology and Innovation ETF (NYSEARCA:) is the newest of biotech ETFs highlighted here and to be clear, it is not a dedicated biotech ETF. Rather, HTEC is designed as a play on the themes of healthcare disruption and innovation, but that can and should some biotechnology exposure. HTEC targets the ROBO Global Healthcare Technology and Innovation Index.
“We anticipate that this technology revolution should profoundly transform the healthcare industry, offering a potential opportunity to investors over the next decade,” . “It is about shifting the model from caring for the sick to one of prevention, prediction and eradication of diseases. It is about enhancing physicians’ accuracy and therapies’ efficacy. Finally, it is about lowering costs. The expected result: longer, healthier lifespans.”
HTEC has a broad lineup at 85 components, but a good percentage of those names dwell in the genomics and pharmaceuticals arenas, giving this fund some credibility as a biotech ETF. Importantly, the intersection of healthcare and artificial intelligence (AI), one of HTEC’s points of emphasis, is real and growing.
“A.I. in health care could balloon to a $6.6 billion industry by 2021 form the $600 million back in 2014. A.I. funding has almost doubled to $2.3 billion in 2018, compared to $1.2 billion in 2017,” .
ARK Genomic Revolution Multi-Sector ETF (ARKG)
Expense ratio: 0.75%
For those looking for active management with their genomics investments, an advisable strategy in many instances, the ARK Genomic Revolution Multi-Sector ETF (NYSEARCA:) is one of the best funds to consider.
“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,” .
ARKG usually holds 30 to 50 stocks, but the fund typically spans into a half dozen fast-growing corners of the biotech space, including CRISPIR, bioinformatics, molecular diagnostics and more.
Past performance is never a guarantee of future returns, but the ARK team are excellent stock pickers. Over the past three years, ARKG is beating the largest biotech ETF by a margin of more than 8-to-1.
Invesco S&P SmallCap Health Care ETF (PSCH)
Expense ratio: 0.29%
The Invesco S&P SmallCap Health Care ETF (NASDAQ:) is an almost biotech ETF. “Almost” because as its name implies, it’s a diverse healthcare ETF, but when small-cap and healthcare stocks come together, biotechnology is usually involved.
PSCH confirms as much as nearly 29% of its holdings, its largest industry weight, are biotechnology names. Earlier, I mentioned that healthcare stocks are trading at attractive valuations, but that’s not the case with PSCH, which trades at 34x earnings. However, for investors that can stomach the added volatility, PSCH is worth the lofty multiples.
Over the past three years, this biotech ETF was 320 basis points more volatile than the S&P SmallCap 600 Index, but the Invesco funds outperformed that index by nearly 2-to-1.
Todd Shriber does not own any of the aforementioned securities.
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