Thanks to election year politicking and posturing, the biotechnology sector was drubbed last year. Nearly as rapidly as big-name biotech stocks and exchange traded funds (ETFs) tumbled, they are rising again this year.
Take the BioShares Biotechnology Clinical Trials ETF (BBC). From its 2016 peak to trough, BBC saw its price nearly cut in half before surging in the post-Election Day healthcare sector bliss. This year, BBC is up 20.5%, more than meeting the 20% gain required for the definition of a new bull market. Two months into the year, BBC is currently 2017's best-performing healthcare ETF.
BBC differs from traditional biotech ETFs in that it focuses solely on companies that have drugs or products in clinical stage trials. As seasoned biotech investors know, clinical trial results can spark massive gains or big declines for the affected stocks. That is particularly true of smaller biotech companies and those are the type of companies found in BBC.
As BioShares acknowledges, some of the companies that reside in BBC may not have sales and are entirely focused on clinical trial success. These are smaller companies with potentially higher volatility and the impact of trial results, known as binary event risk, is a risk to be considered.
"Clinical Trials stage companies are typically younger, smaller companies which do not have a drug approved, but instead focus on testing their experimental drug candidates in human clinical trials. Successful companies prudently manage their balance sheets through financings and partnerships in order to develop their potential blockbuster drugs," according to BioShares.
Underscoring the fact that BBC is essentially a small-cap fund is the fact that 96% of the ETF's 70 holdings have market values of less than $2.7 billion and almost half of that group have market caps of $600 million or less, indicating some BBC constituents are micro-cap names.
BBC is useful for investors looking to capture some of the potential upside offered by Food and Drug Administration (FDA) trial results without the burden of having to stock pick. That makes BBC all the more alluring in the current environment. After FDA approvals slumped last year, the Trump Administration is expected to take steps to lift some of the impediments in the FDA approval process.
With that advantage, comes the requirement that investors must acknowledge BBC is not a free lunch, meaning it is usually more volatile than traditional biotech or diversified healthcare ETFs.
Source: http://www.investopedia.com/news/biotech-etf-tear-bbc/
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