I t's old hat that biotech ETFs are beating the stock market. But three are new launches flying under the radar of many investors.BioShares Biotechnology Products ( BBP ) holds stocks such asCelgene ( CELG ) andAnacor Pharmaceuticals ( ANAC ) that have shone of late. Two others focus on businesses in the clinical trial stage.
"These are very innovative ETFs investing in companies at the cutting edge of medical research," says Neena Mishra, director of ETF research at Zacks Investment Research. She thinks they can keep beating their peers, as they have since their December 2014 launch.
ALPS Medical Breakthroughs ( SBIO ), which invests in companies with at least one drug in clinical trials, tops health care sector ETFs with a 55% spike this year. BBP scored 40.3% stock market gains andBioShares Biotechnology Clinical Trials ( BBC ) 38.5%. By comparison, the more established iShares Nasdaq Biotechnology (IBB) is up 28.8% year to date.
Biotechs have led the stock market for several years. The still-steep ascent is drawing some caution. Some analysts worry about lofty valuations. Not Mishra.
"There are still many reasons to be positive on the industry," she said, citing a merger uptick, positive drug-trial results and more industry-friendly FDA approvals.
What the three debutante ETFs share in common is a skew toward small- and midcap biotech players.
An equally weighted ETF, BBP invests in 39 stocks with an average market cap of $3.5 billion. Anacor, an outperformer in the past year, made headlines this week on positive data for an experimental skin ointment . Other holdings with triple-digit gains in the last year includeMomenta (MNTA),Dyax (DYAX),Biomarin (BMRN) andRetrophin (RTRX).
The cap-size skew is paying off. Bigger, more well-known biotech companies rely on new therapies from smaller firms that they acquire, given the time-consuming nature of drug development and the "alarming rate of failure" involved, Mishra said.
On the flip side, smaller companies tend to be more volatile in price. And for companies in clinical trial stages, chances of failure are high. That makes ETFs holding these companies high-risk, high-reward bets for investing success .
Still, strong inflow for these ETFs reflects investors' hopes for gains. They absorbed roughly $146 million combined in new money in the first six months of the year.
Assets have grown at a rapid clip, especially for SBIO. It started 2015 with roughly $2.5 million. It now holds $161.5 million.
New ETF strategies involve inherent risks. Funds sponsors could shut down the product if it fails to gather sizable assets. Investors may face higher trading costs in the form of wide bid-ask spreads.
"Investors with lower risk tolerance should focus on broader biotech ETFs," Mishra said.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.