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A Junior Biotech ETF With Home Run Potential

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The Defiance Nasdaq Junior Biotechnology ETF (IBBJ) is one of the newest exchange traded funds on the market and it could be one of the most appropriate for the current environment.

IBBJ’s 176 member firms “are “engaged in biotech research and development, the sale or licensing of biological substances for the purposes of drug discovery and diagnostic development; and pharmaceutical manufacturers of prescription or over-the-counter drugs, including vaccines and development and manufacturing companies,” according to Defiance.

With the coronavirus pandemic commanding so many headlines, it’s IBBJ is useful today, but it could be a winning long-term bet, too.

“Prior to IBBJ’s debut, there was just one dedicated small-cap healthcare ETF and one fund focusing on biotech names in the $5 billion market cap and below space. Historical data confirm those products have been winners, generating an average three-year return of 52.7 percent compared to a 13.3 percent gain for the S&P SmallCap 600 Index,” according to Nasdaq.

Inside the IBBJ ETF

Proving the potency of small-cap biotech, IBBJ’s underlying index is up nearly 10% since inception. Smaller companies tend to have more room to run or grow, compared to larger companies, especially in areas like biotechnology and pharmaceuticals where smaller companies can come out with breakout innovative medicines that can generate huge growth. These smaller companies are also potential acquisition targets for larger companies seeking to diversify their product lines.

“The Nasdaq Junior Biotechnology Index is designed to track the performance of a set of securities listed on The Nasdaq Stock Market® (Nasdaq®) that are classified as either biotechnology or pharmaceutical according to the Industry Classification Benchmark (ICB),” according to Nasdaq.

To the point of industry consolidation, of which there could be plenty during and after the COVID-19 pandemic, IBBJ is a useful tool on that front, too.

“Not all IBBJ components are legitimate takeover targets, but for those that are, there’s twofold promise on that front. First, many large-cap, old pharmaceuticals companies are facing major patent cliffs over the next several years,” notes Nasdaq. “Second, the 10 largest biotech and pharmaceuticals companies in the S&P 500 had an average cash stockpile of $10.7 billion as of mid-June. That’s more than enough to go shopping among IBBJ holdings.”

IBBJ is less than two weeks old and charges 0.45% per year, or $45 on a $10,000 investment.

For more on innovative portfolio ideas, visit our Nasdaq Portfolio Solutions Channel.

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