This Biotech ETF Has Thus Far Delivered On Its Potential
Summary The ALPS Medical Breakthroughs ETF – a fund focused on companies in late stage clinical trials – has jumped over 20% YTD, far outperforming small cap & biotech counterparts. This ETF looks for companies with at least one drug in stage II or stage III clinical trial. The fund’s managers have demonstrated a solid albeit short track record over the ETF’s nine month history outperforming small cap, biotech and pharma indices. This ETF was hit especially hard during this week’s rout in biotech. At the beginning of the year, I profiled the ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ). It’s a fund that is trying to carve out a unique niche in the biotechnology space by investing in those companies engaged in late stage clinical trials. By their very nature, these companies and the ETF itself are a high risk, high reward proposition but in its brief nine month history the fund has been able to deliver on its potential. First off, let’s review the investment criteria of the fund… To qualify for this ETF the company must have at least one drug in either stage II or stage III clinical trial. Often times these companies are very small (currently about 70% of fund assets are devoted to either small cap or micro cap businesses) and generate little if any revenue. Their upside is captured in either the success of the drug in trial or the possibility of being acquired by a larger company. Since its inception at the beginning of the year the fund has delivered against just about any benchmark you can think of. While the fund has whipsawed around and experienced the high degree of volatility that one would expect from a small cap biotech ETF the fund has managed to deliver outsized returns in its short existence. Consider its performance against the biotech indices… SBIO Total Return Price data by YCharts Biotechs in general have performed well this year beating the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) by a large margin and more than doubling up on the SPDR Biotech ETF (NYSEARCA: XBI ). The ALPS ETF does have a roughly 50-50 weighting of both biotechs and pharmaceutical companies but this chart demonstrates how this ETF is handily beating both the SPDR S&P Pharmaceuticals ETF (NYSEARCA: XPH ) and the iShares U.S. Pharmaceuticals ETF (NYSEARCA: IHE ) for the pharma sector as well. SBIO Total Return Price data by YCharts Measuring against the small cap ETFs (the iShares Core S&P Small-Cap ETF (NYSEARCA: IJR ) and the Vanguard Small Cap ETF (NYSEARCA: VB )) yields similar results. SBIO Total Return Price data by YCharts Perhaps a fairer comparison comes when you look at this ETF against the ETF that debuted just a couple of weeks earlier – the BioShares Biotechnology Clinical Trials ETF (NASDAQ: BBC ). SBIO Total Return Price data by YCharts I say a fairer comparison instead of a good comparison because while the two ETFs share a similar strategy of going after clinical trial companies the stocks they target are quite different. For example, the ALPS ETF typically invests in nothing with a market cap greater than $5B. In comparison, the BioShares ETF has over half of its assets in companies with market caps greater than $10B. Perhaps it’s not surprising that the BioShares ETF has performed much more in line with its counterparts. It’s not all smooth sailing though with biotechs though. Biotechs in general lost roughly 10% of their value this past week alone giving shareholders a first hand look at the risks involved in these emerging companies. Putting further pressure on biotechs was the news that Hillary Clinton is looking to rein in prescription drug costs and place a monthly cap on some premiums. This is campaign season and everything we hear from politicians at this point should probably be taken with a whole shaker of salt but potential revenue limits could be a consideration going forward. Conclusion Nine months is a very short time to be judging performance but it’s encouraging to see how well the fund managers have been able to outperform in such a challenging environment. The short track record has done wonders in attracting investment to the fund as it already has $160M in AUM – far more than the roughly $28M managed by the BioShares ETF. An overall expense ratio of just 0.50% also helps its cause. The focus on companies engaged in later stage clinical trials offers greater intrigue. By stage II or III, the drug has cleared its initial hurdles and stands a much better chance of making it to market and that helps remove a level of risk and uncertainty. However, we have many examples of what happens to a company’s stock if its drug fails in trial. While the home run potential is there with many of these companies there’s also a huge downside risk if the drug fails to get approved. So far, the initial results are encouraging as the managers have had an albeit small degree of success in picking the right stocks. I like the promise of this ETF, although I’m also waiting to see how the managers perform over a longer time frame.