Using ETFs to Prepare for Biotech Bounceback

With the S&P 500 down 22% year-to-date, it’s not hard for equity investors to find sources of disappointment. At the sector level, not much is working besides energy.

Healthcare, usually a defensive sector, hasn’t been much to write home about. Biotech is a significant drag on the broader healthcare space this year. After displaying overt leadership during the previous growth stock-led bull market and rallying in 2020 due to coronavirus vaccine speculation, the largest biotech exchange traded fund gained a scant 1% last year and is off 16% in 2022.

It remains to be seen when biotech stocks and ETFs bounce back and investors are undoubtedly frustrated. The pace of consolidation in the industry is sluggish as is the pace of introduction of blockbuster drugs.

Fortunately, there are reasons to keep the faith when it comes to biotech ETFs. Growth stocks, including some biotech fare, are attractively valued. Some analysts believe mergers and acquisitions activity in the arena quicken next year and some experts believe the Food & Drug Administration (FDA) is keen to speed along drug approvals in 2023. With those factors in mind, here some battered biotech ETFs that could be worth considering as the new year beckons.

Invesco Nasdaq Biotechnology ETF (IBBQ)

The Invesco Nasdaq Biotechnology ETF (IBBQ) is arguably a prime example of a biotech ETF that deserves more attention. IBBQ is just a year and a half old, but its plumbing is pertinent as it follows the venerable Nasdaq Biotechnology Index.

That’s one of the most widely observed biotech benchmarks and one that’s followed by scores of professional investors. One reason for that is diversification. IBBQ’s underlying index is home to large-, mid- and small-cap stocks. As such, IBBQ is home to 363 stocks, giving it one of the largest lineups among all biotech ETFs.

There’s more to like with the Invesco fund. Its annual fee is just 0.19%, or $19 on a $10,000 investment, making it one of the most cost-effective funds in the category.

VanEck Biotech ETF (BBH)

The VanEck Biotech ETF (BBH) could be one of the ideal ways for investors to play an uptick in consolidation in the biotech industry because the fund offers investors an interesting mix of prospective buyers and potential targets and that’s a trait to consider moving forward.

“Expect to see big pharma picking up earlier stage companies to try and fill the pipeline gaps that are likely to start in 2024,” according to a recent PwC report. “While market conditions suggest bargain prices for biotech are possible, recent transactions indicate that pharma companies are still paying significantly above current trading prices (ranging from approximately 50 to 100% of current trading), but below the peak valuations of recent memory.”

BBH is a much different beast than IBBQ because the VanEck fund is home to just 25 stocks.

First Trust NYSE Arca Biotechnology Index (FBT)

The First Trust NYSE Arca Biotechnology Index (FBT) is one of the more battle-tested ETFs in this category as it’s more than 16 years old. More importantly, FBT is a compelling choice for investors looking to position for a biotech resurgence.

“Performance aside, hopeful signs are emerging thanks to more clarity on which drugs may be impacted by future anticipated price controls stemming from the recent passage of the Inflation Reduction Act, a robust pipeline of promising medicines and therapeutics, and a surprisingly resilient track record for the industry during periods of economic weakness,” according to First Trust research. “In our view, biotechnology is uniquely positioned to provide exposure to important innovations whose value may not be well reflected in equity prices today.”

The $1.34 billion FBT holds 30 stocks, none of which exceed an allocation of 3.67%.

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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