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Summary ALPS Medical Breakthroughs ETF targets biotech and pharmaceutical companies with drugs in Stage II or Stage III clinical trials. This ETF looks for small cap and mid cap companies with greater liquidity and enough cash on hand to survive for at least two years. The management fee for this product is very reasonable compared to other similar products in the biotech area. The boom or bust nature of many of these companies makes it appropriate for only a smaller portion of your portfolio. ETF providers seem eager to take advantage of the popularity of biotechs recently. The biotech sector as measured by the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) was up 34% in 2014 and has seen its assets more than double in the past 18 months. In addition, five new biotech ETFs have been launched since the end of 2014 and four of them are targeting unique niches within the biotech universe. I covered one of those ETFs – the BioShares Biotechnology Clinical Trials ETF (NASDAQ: BBC ) – recently and now another specialty biotech ETF has hit the market. The ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ) launched on December 31, 2014 and is targeting biotech and pharmaceutical companies that have one or more drugs currently in later stage clinical trials. According to the fund’s fact sheet , the company needs to meet the following criteria in order to be considered for inclusion in the ETF: U.S. listed biotech or pharmaceutical firm with 1 or more drugs in Phase II or Phase III FDA clinical trials Enough cash for 24 months at current burn rate Maximum weighting of 4.5% of assets at rebalance A market cap between $200 million and $5 billion Average daily volume > $1 million The fund mandate appears to be logical. Many of the big biotech firms have been having trouble getting new drugs in the pipeline so the focus here is to look instead at the smaller and midsize companies that have promising drugs that are potentially nearing approval. The benefit is two-fold. The approval of a drug that becomes successful in the market could become a huge cash cow for the company and for smaller companies like these could literally alter their landscape. The companies that have a newly approved drug could also end up being the target of a larger firm looking to add to their own channels. With an expense ratio of 0.50%, the management fee for this ETF is quite reasonable. Biotech is one of the sectors that most investors would benefit from putting the professionals in charge as researching and choosing investments individually among the drug companies can be quite cumbersome and costly if not done properly. It probably goes without saying though that the risk involved in these companies can be significant. Since we’re dealing with drugs that are in clinical trial but not yet approved, there’s a bit of a boom or bust proposition here as there’s no guarantee that any of these in-trial drugs will get approved. A drug that gets rejected represents months of work and millions in cost that will see no return on investment and therefore the volatility with these companies can be very high. Investors should only allocate a small portion of their portfolios to a product like this. Conclusion The idea of striking while the iron is hot is nothing new so it’s not surprising to see several new biotech ETFs popping up. This ETF’s focus is particularly intriguing as targeting biotech companies that are making significant investment in and progress towards developing new drugs can be quite lucrative to investors. The management style seems well thought out as well. The 24 months of cash requirement helps ensure that these companies will be around for a while and have the time and resources to develop their products. Looking for companies with a higher trading volume allows investors to buy and sell shares without that high bid-ask spreads that could make investment in these companies unnecessarily costly. Given the target niche of the biotech sector, the company selection philosophy and the reasonable cost, this ETF should be a consideration for investors looking for exposure to biotechs. Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague Scalper1 News
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