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Bank on BBH for Surprising Protection

Owing to its reputation as a growth-heavy industry that’s been disappointing investors since early 2021, biotechnology probably isn’t the first destination investors think of when seeking shelter-from-the-storm ideas.

Look now because the VanEck Vectors Biotech ETF (BBH) jumped 5.15% in July, closing higher by 1.81% last week. Indeed, biotech stocks and exchange traded funds have a long way to go to regain lost form, but rallies have to start somewhere, and recent bullishness could be a sign of better things to come for the $470.7 million BBH.

BBH, which follows the MVIS US Listed Biotech 25 Index, could be uniquely positioned among biotechnology ETFs to provide refuge from broader market turbulence. The VanEck fund’s 25 holdings are mostly large-cap, mature biotech companies that aren’t nearly as speculative as their small-cap peers. That’s a trait to consider in this market environment.

“Strategists at Goldman Sachs, Morgan Stanley, and BofA Global Research are among those favoring the healthcare sector, given that the companies’ businesses are expected to hold up better than others should the economy face a downturn,” according to Reuters.

Among the reasons some strategists embrace healthcare are compelling valuations and quality traits. While valuation alone isn’t a reason to buy or sell as stock or ETF, the quality is persistent. Owing to strong balance sheets, some BBH components possess that enviable trait.

On a related note, a component in the broader quality concept is earnings quality — something the healthcare sector has. That sentiment extends to some BBH member firms, potentially adding to the fund’s durability case.

“Earnings in the healthcare sector – which includes large drugmakers, medical equipment companies, health insurers, and biotech firms – have outperformed in recent recessionary periods. That makes them an attractive target for investors looking for assets that can weather a potential downturn, as recession worries grow amid aggressive monetary policy tightening from the Federal Reserve,” reported Reuters.

Speaking of earnings growth, the healthcare sector’s earnings growth over the past quarter century topped that of the S&P 500 in a noticeable fashion. And if that’s not enough for long-term investors considering BBH, there are some discounts to be had in the healthcare arena.

“Healthcare also remains relatively more attractive than other so-called defensive stocks based on standard valuation metrics,” added Reuters. “Healthcare is trading at 15.7 times forward earnings estimates against its long-term price-to-earnings average of 17.5 times, according to Refinitiv Datastream. That represents a 10% discount.”

For more news, information, and strategy, visit the Beyond Basic Beta Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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