The Love & Hate Of Biotech ETFs

January 23, 2020

Remember a few years ago when biotech ETFs were the hottest ticket in town? ETFs like the iShares NASDAQ Biotechnology ETF (IBB) and the SPDR S&P Biotech ETF (XBI) would rally 75% or more in a given year.

We saw bubblelike rallies in the early 2000s. We saw them again in the mid-2010s.

Then, in the last few years, this health care segment all but lost the wind on its sails.

Biggest Biotech ETF

IBB, the biggest biotech ETF, with $7.4 billion in assets under management, hasn’t retested record highs in five years, grinding sideways for much of the time.

Chart courtesy of StockCharts.com

 

What Gives?

As a segment, biotech seemed reenergized in the last quarter of 2019. Strong fundamentals, attractive prices following a prolonged decline, and plenty of capital going around to fund these growthy names all pushed the segment higher late last year.

Many analysts kicked off 2020 by calling for biotech stocks to shine this year, continuing 2019’s late upward momentum.

The good—and sometimes bad—news for biotech ETF investors is that it doesn’t take much to see biotech stock prices move sharply.

Virus Outbreak Puts Funds In Spotlight

This week, we’ve witnessed exactly that—a sudden turnaround—with the outbreak of the coronavirus in Asia pushing vaccine and other biotech names sharply higher.  

Vaccine developer Novavax (NVAX) was up almost 13% in early trade Thursday after earlier-week gains; Moderna (MRNA) was up nearly 10%. These stocks have been rallying as news of the spreading outbreak hits the market.

Novavax is a micro-cap stock that’s nowhere to be found in the biggest biotech ETFs. The only allocation to that stock in this segment—and a very small one at that, at 0.01%—is in the iShares Evolved U.S. Innovative Healthcare ETF (IEIH).

IEIH is part of iShares’ “Evolved” lineup of funds that relies on artificial intelligence to define sectors, and it’s not truly a biotech fund. With 233 stocks, IEIH offers exposure to pharmaceuticals and biotechnology companies such as Johnson & Johnson, Merck, Pfizer and Bristol-Myers.

 

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

 

Accessing Moderna is a little easier. The stock can be found in several biotech ETFs, including IBB and XBI (between 1-1.5%).

But the biggest allocation to this stock is in much smaller funds that have been gathering traction due to their strong focus on genetics and immunotherapy.

Smaller Genetics-Focused ETFs Standing Out

Among the funds to note here is the Loncar Cancer Immunotherapy ETF (CNCR), which has Moderna among its top five holdings, at 4.5% of the portfolio.

CNCR is a portfolio of companies that manufacture cancer immunotherapy drugs or that are in clinical trials for these drugs in the U.S. and in Europe. The mix is equal-weighted, offering more exposure to some smaller names in this segment.

The iShares Genomics Immunology and Healthcare ETF (IDNA) is another ETF that has Moderna, at about 4.2% allocation. IDNA invests in companies involved in genomics, immunology and bioengineering across the globe. Stocks in this portfolio are scored based on revenue generated by these industries, looking for companies that would benefit the most from any innovation in these areas. IDNA launched last summer, and has $26.5 million in total assets.

Another small ETF that could emerge as a winner on the heels of this China-centered virus outbreak is a fund that focuses on China’s biopharma segment, the Loncar China BioPharma ETF (CHNA). The fund invests in pharmaceutical and biotech companies, drug manufacturers and service providers, focusing on the biggest innovators in the space.

It’s a tiny ETF, with under $12 million in assets, but, it’s also a young fund, having come to market in 2018.  

Standout Favorite

One fund that has been emerging as a star in this segment, and becoming a favorite in this space, is the ARK Genomic Revolution ETF (ARKG).

ARKG is an actively managed fund that targets companies involved in the genomics industry. These are mostly small companies—the average market cap of the portfolio is $20 billion—and the fund relies on ARK’s expertise to get in and out of positions as the market turns. Biotech represents about 75% of the fund’s segment breakdown, with names like Illumina, CRISPR Therapies and Invitae leading allocation.

ARKG is up 82.2% since its debut about five years ago, and currently sits near all-time highs. The fund has amassed more than $505 million in total assets under management along the way.

What’s Ahead?

At the end of day, it remains to be seen what happens next in biotech.

The question has lingered as to what drove the segment to have such lackluster performance in the past few years. This is a segment that sits on the edge of technological and scientific innovation, so has the poor performance (up until recently) been a reflection of a lack of new breakthroughs? Maybe.

And if so, it could be that 2020 changes that narrative as the market awaits what could potentially be the first Alzheimer’s drug to gain approval, according to reports.

It could also be that the recent track record on earnings and IPOs for this segment is mixed at best—there have been success stories, but plenty of disappointment as well. Biotech companies are great at innovating, but they struggle to make a profit a lot of times.

In fact, most biotech ETFs have portfolios with negative price-to-earnings ratios, meaning these companies, which hold massive growth potential, often lose a lot of money along the way. Consider that XBI, for example—which holds more than 120 stocks—has currently a weighted average P/E of -20, according to FactSet data. IBB’s P/E is massively negative as well. CNCR and ARKG are in the same boat.

Perhaps it’s that biotech can’t shake off the political overhang, with drug pricing at the forefront of political debates. And the ongoing opioid epidemic and subsequent lawsuits making for sensational headlines don’t help.  

Chances are, it’s a little bit of everything driving this segment up and down.

Contact Cinthia Murphy at [email protected]

 

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