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Biotech ETFs: Destinations For Investing in Innovation

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The SPDR S&P Biotech ETF (NYSEArca: XBI), one of the largest biotechnology exchange traded funds (ETFs), is up more than 24% this year, indicating the biotech space remains in favor as investors look for avenues to access innovative concepts and themes.

Healthcare stocks are also showing attractive valuations relative to other defensive sectors, which are richly valued. Biotechnology historically trades at multiples that are elevated relative to broader benchmarks, but after last year’s of struggles for biotechnology names, some analysts see value with some big-name biotech stocks.

“Record novel drug approvals, together with several newly commercialized drugs targeting large disease markets (e.g., cancer, diabetes, respiratory illnesses) may support strong industry growth in the coming years,” said State Street in a recent note.

What’s Next for Healthcare ETFs

Healthcare ETFs, including biotech funds, could benefit from politicians’ plans to lower drug prices, something the White House took aim at last year. The administration has focused primarily on middlemen like pharmacy-benefit managers instead of manufacturers. The new policies have a more subtle affect on the overall industry as it may affect sales of certain blockbuster drugs but damage the share prices of smaller companies.

Importantly, biotechnology industry sales projections have been trending higher since the end of 2018, bolstering the case for ETFs such as XBI.

The $4.27 billion XBI “seeks to track a modified equal weighted index which provides the potential for unconcentrated industry exposure across large, mid and small cap stocks,” according to State Street.

Adding to the case for biotech investments is that, broadly speaking, valuations in the group currently are not excessive. That is something to consider when noting biotechnology stocks often trade at premiums to the healthcare sector and broader market.

“Finally, despite recent strong performance, biotech industry valuations are not stretched, trading around their 10-year median based on price to next-year sales,” said State Street.

Investors have pulled $199.16 million from XBI this year.

For more information on the healthcare industry, visit our healthcare category.

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