ETFs to Play Biotech M&A

NEW YORK (SmartStops) -- Exchange-traded funds such as SPDR S&P Biotech ETF (XBI), the iShares Nasdaq Biotechnology ETF (IBB), the Biotech HOLDRs (BBH) and the iShares Dow Jones US Pharmaceuticals (IHE) have been affected in recent weeks by a significant uptick in mergers and acquisitions in the sector.

This activity has been fueled by cash-heavy companies looking to diversify and broaden their horizons.

To put this into perspective, in just two days, nearly $3.1 billion in biotech-related deals were announced, and some suggest more activity is to come.

Big Pharma front-runners such as Pfizer (PFE), Sanofi-Aventis (SNE), Amgen (AMGN) and Merck (MRK) are expected to find themselves in something of a rut because of expiring patents and lackluster drug pipelines.

As a result, Big Pharma is likely to look at smaller, more nimble companies that are focusing on specific treatments and medical specialties.

Some ETFs that are likely to be influenced by this increased activity include:

• SPDR S&P Biotech ETF, which allocates nearly 51.5% of its assets to small-cap companies and 30.75% to medium-cap companies, which are the most susceptible to M&A activity.
• iShares Nasdaq Biotechnology ETF, which tracks big players like Amgen as well as small and mid-cap stocks that are prime targets for M&A.
• Biotech HOLDRs, which predominantly allocates its holdings to large-cap companies such as Amgen, Gilead Sciences (GILD) and Biogen Idec Inc (BIIB). These are the likely acquirers in the sector.
• iShares Dow Jones US Pharmaceuticals, which includes drug giants Pfizer and Merck among its top holdings.

At the time of publication, Grewal had no positions in stocks mentioned.

Written by Kevin Grewal in Laguna Niguel, Calif.



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Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net , where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.