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ALPS Puts Twist on Biotech Investing with Medical Breakthrough ETF

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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 (read: 3 Biotech ETF Winners from 2014's Best Performing Sector).

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 fund is named ALPS Medical Breakthroughs ETF and trades under the ticker symbol of SBIO.

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, Receptos and Seattle Genetics 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 BioShares Biotechnology Clinical Trials Fund (BBC - Free Report) and BioShares Biotechnology Products Fund (BBP - Free Report) (read: Inside the Two New Innovative Biotech ETFs from BioShares).

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 (read: The Complete Guide to Biotech ETFs).

Apart from these, the space is fully packed with products being ruled by the $11.8 billion ETF SPDR Health Care Select Sector Fund (XLV) and the $7 billion ETF 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. 

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