3 ETFs to Play Biotech's Bounce Back From Disaster

The adage "There's no such thing as bad press" is a lot of malarkey (to use a word favored by Vice President Joe Biden). That's especially true when it comes to the volatile biotechnology sector, which relies on the goodwill of regulators, politicians and the public. For biotech stocks, bad press is a killer.

Earlier this year, when high-profile "price gouging" scandals engulfed Valeant Pharmaceuticals and Turing Pharmaceuticals, the entire biotech sector was put in the public stockade. Turing's founder and former CEO Martin Shkreli became the reviled Snidely Whiplash of corporate America, presidential candidates vowed to punish Big Pharma and biotech investors ran for the hills.

The Nasdaq Biotechnology index (^NBI) has fallen 14% year to date. In the first quarter, negative headlines and contentious congressional hearings weighed on the index. Plunging energy prices, economic disarray in China and signs of slowing global growth didn't help.

But as many of these challenges dissipated in the second quarter, biotech investors started running back. Biotechnology is now home to a bevy of growth opportunities that should beat the market this year.

The key to profiting from biotech's resurgence is to find quality biotech stocks with room for growth that also aren't excessively risky. Below, we spotlight three biotech exchange-traded funds that have already done the homework for you.

Over the past three months, the broader indices have rallied, with biotech leading the way. China's economy is showing signs of renewed strength; oil prices are rising and approaching $50 a barrel; and global growth remains on track (albeit modestly).

What's more, the political pressure on biotech appears to be easing, as committee hearings into drug pricing fade into the background. Biotech has been bouncing back, with the NASDAQ Biotech Index gaining 12% over the past three months, compared with 6.9% for the S&P 500 .

Several biotech/pharma companies also are benefiting from a growing number of drug approvals and new product launches. The U.S. Food and Drug Administration approved 45 new drugs in 2015, the most since 1996 and four more than in 2014. The FDA is on a pace in 2016 to exceed last year's number of approvals.

Stimulating new drug approvals is the increasing occurrence of health emergencies that confound conventional treatment. Notably, researchers are searching for novel painkillers that aren't opiate based, to address the worsening epidemic in America of opiate addiction. In addition, the race to find a cure for the deadly Zika virus is a catalyst for the development of "biologic" drugs, which are manufactured from a living cell to create a complex mixture of molecules.

Let's take a closer look at our trio of biotech ETFs, in ascending order of risk. Biotech's recent woes have made the sector's stock valuations more reasonable, setting the stage for robust performance. Each ETF explored below is teed-up for market-thumping growth this year and beyond:

1. SPDR S&P Biotech ETF (XBI)

With net assets of $2.16 billion, this fund seeks results that correspond to the total return performance of the S&P Biotechnology Select Industry Index. As such, the SPDR S&P 500 Biotech ETF is more diversified than our other two choices. Year to date, the SPDR S&P Biotech ETF is down 12%, but over the past three months it has soared 18%.

Top holdings include Agios Pharmaceuticals, Cepheid, Medivation, Puma Biotechnology and Ionis Pharmaceuticals. Expense ratio: 0.35%.

2. iShares Nasdaq Biotechnology ETF (IBB)

With net assets of $7.41 billion, this fund seeks to track the investment results of the NASDAQ Biotechnology index. This ETF is down 14% year to date but up 12% over the past three months.

Top holdings include Celgene, Biogen, Amgen, Gilead Sciences and Regeneron Pharmaceuticals. Expense ratio: 0.48%.

3. ALPS Medical Breakthroughs ETF (SBIO)

With net assets of $140.54 million, this is the smallest and riskiest of our three biotech ETFs.

The ALPS Medical Breakthroughs ETF seeks results that correspond to the performance of its underlying index, the Poliwogg Medical Breakthroughs Index, which is made up of small- and mid-cap stocks of biotech and pharmaceutical companies that have one or more drugs in either Phase II or Phase III FDA clinical trials.

The fund emphasizes "game-changing" entrepreneurial companies. These are small- and mid-cap biotech rocket stocks that are poised to take off. They have a market cap of not less than $200 million and not more than $5 billion. The earlier-stage firms in the ALPS Medical Breakthrough ETF's underlying index, the Poliwogg Medical Breakthroughs Index, devoted more of their combined market caps to research and development than the components of the Nasdaq Biotech index did.

Top holdings of these ETFs include Seattle Genetics, Dyax, Anacor Pharmaceuticals, Neurocrine Biosciences and Ultragenyx Pharmaceutical. Expense ratio: 0.50%.

The ALPS Medical Breakthoughs ETF is down 21% year to date the sharpest decline of our three choices. This only makes sense because it's the riskiest. Over the past three months, SBIO has gained 9%.

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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, he owned none of the stocks mentioned. Persinos appears as a regular commentator on the financial television show "Small Cap Nation." Follow him on Twitter.

 

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