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A New Biotech ETF Targets Companies In Late Stage Clinical Trials

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

ALPS Puts Twist On Biotech Investing With Medical Breakthrough ETF

Health & Biotech Equities ETFs had an astounding 2014 with the NASDAQ Biotechnology index returning a stellar 34% in 2014 – emerging as the biggest winner among all the sectors. Despite overall valuation concerns in the early phase of the year, the sector moved along strongly on rising merger and acquisition activities, several important product approvals and label expansions, ever-increasing health care spending, an aging population and last but not least Obamacare. In fact, there is likely little chance of the winning momentum snapping in the near term. Rather, health & biotech stocks are constantly giving positive signals as we move ahead into 2015. Sensing this wave, ALPS has recently launched a new type of biotech ETF. However, many investors must have noticed that, of late, there has been a surge of unique product issuances which do not deal with the cap-weighted and regular-themed index, but rather focus on the smart-beta technique or look for some unique concepts. The recently launched health & biotech ETF is also a fresh themed, being the maiden ETF structured to seize the all-important R&D opportunities in the pharma industry. The ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ) in Focus The fund looks to track the Poliwogg Medical Breakthroughs Index. The fund mostly consists of mid and small caps with a market cap of not below $200 million and not above $5 billion. The index screens the U.S. listed biotech and pharma companies with one or more drugs in Phase II or Phase III FDA clinical trials. Also, the companies need to have cash for 2 years at their normal burn rate. This fund holds 75 stocks with moderate concentration in the top 10 holdings. The top 10 companies hold a 36% share of total net assets. Among individual holdings, top stocks in the ETF include NPS Pharmaceuticals (NASDAQ: NPSP ), Receptos (NASDAQ: RCPT ) and Seattle Genetics (NASDAQ: SGEN ) comprising 4.96%, 4.32% and 4.15%, respectively, of total net assets. The fund charges 50 bps in fees. How Might it Fit in a Portfolio? The fund is an interesting choice for investors seeking to gain exposure to the high potential health & biotech space. As per the portfolio manager for the ALPS ETF Trust, the fund hit the market at an opportune moment when a number of blockbuster drugs from the 1990s and 2000s have been losing patent protection and Big Pharma is struggling to boost its pipelines. The manager further notified that due to time-consuming procedure and an alarming rate of failure for drug development, the big and well-known companies normally rely on new therapies processed by smaller firms that splurge on R&D as compared to large cap stocks. As per the issuer , the earlier-stage firms in the Poliwogg Medical Breakthroughs Index (PMBI) poured in about 2.7% of market cap on R&D, 29% higher than what has been spent by the NASDAQ Biotech index components. Moreover, firms in the PMBI allocated about 2.0% on non-R&D operating expenses relative to 2.6% by the more recognized firms. Can it Succeed? Though the fund is the pioneer in its theme, another brand new product on a similar subject was launched in December in the name of the BioShares Biotechnology Clinical Trials Fund (NASDAQ: BBC ) and the BioShares Biotechnology Products Fund (NASDAQ: BBP ) . BBC tracks the LifeSci Biotechnology Clinical Trials Index to measure the performance of biotechnology companies with a primary product offering that is in a Phase 1, Phase 2 or Phase 3 clinical trial stage of development. These biotechnology clinical trial companies conduct clinical human trials with the ultimate aim of gaining FDA approval. BBP, on the other hand, tracks the LifeSci Biotechnology Products Index to measure the performance of biotechnology companies with a primary product offering that has received U.S. Food and Drug Administration approval. However, both funds charge 85 bps a year giving SBIO an edge to success. Apart from these, the space is fully packed with products being ruled by the $11.8 billion ETF, the SPDR Health Care Select Sector Fund ( XLV ) , and the $7 billion ETF, the iShares Nasdaq Biotechnology Index Fund ( IBB ) . However, thanks to the relatively new theme, we expect the newly launched product to find a solid following among investors.