On August 1, Fidelity took direct aim at index fund competitors Vanguard, Blackrock’s iShares ...
BBC and BBP: A Drug Data Split
11/30/2015 10:39 am EST
Michael Berger, of Technical420.com, highlights two completely different types of funds in the biotech space, one that only invests in early stage, smaller companies in the clinical trial process and one that invests in biotech companies that already have FDA-approved products on the market.
After launching its first two funds in December 2014, BioShares has seen assets under management increase by over 1000%. Its funds, BioShares Biotechnology Clinical Trials (BBC) and BioShares Biotechnology Products (BBP), split the biotech sector into higher risk clinical stage stocks and those that already have an FDA approved product.
Biotech stocks generally trade based on drug data. If the drug reports unfavorable data or misses its expected endpoint, the stock could lose most of its value in one day. If a drug, however, reports favorable data or meets its expected endpoint, the stock can soar by double and triple digits that day.
Two Completely Different Funds
BBC only invests in early stage, smaller companies that are in the clinical trial process and do not have an approved drug. These companies are considered to be more risky because they are not currently selling a product. BBC gives investors the opportunity to invest in smaller early stage companies that are in their pre-revenue stage.
BBC is a pure-play biotech fund and its underlying index excludes companies such as: large pharmaceutical, specialty pharmaceutical, medical device, healthcare services, diversified healthcare, life science tools, animal health, and other such sectors.
BBP tracks the BioShares Biotechnology Products Index, which is sponsored by LifeSci Index Partners. The index follows United States listed biotech companies which offer an FDA approved product.
BBP invests in biotech companies that already have FDA-approved products on the market. The fund is comprised of larger and less volatile companies. BBP invests in companies that generate revenue and are thus less dependent on raising capital to fund growth initiatives. For this reason, investors do not have to worry as much about a poor clinical trial data being released.
BioShares Differentiates Itself from Competition
The way BioShares is able to differentiate itself from its competition is through the use of an equal weighting pricing method. This assigns the same weight to each company in the fund and allows all of the companies to be considered on an even playing field.
Equal weighting differs from the method more commonly used by funds and portfolios in which stocks are weighted based on their market capitalizations. Equal-weighted index funds tend to have higher stock turnover than market-cap weighted index funds and, as a result, usually have higher trading costs. The expense ratio of BBC and BBP is 0.85%, which is higher than the average ETF at 0.6%.
Although the costs associated with this type of weighting method is higher, it helps protect investors from inherent binary risk in the biotech industry. This can be shown by comparing BBC to ALPS Medical Breakthroughs ETF (SBIO), which uses the market capitalization pricing methodology.
On November 16, 2015, Clovis Oncology (CLVS) fell more than 70% after the FDA requested more information on its drug. Because of the different weighting methodologies, CLVS has a 1.5% weighting in BBC and a 3.6% weighting in SBIO. SBIO saw its fund fall 2.96% while BBC fell 2.12%.
During 2015, BBP and BBC are up 19% and 7.3% respectively. We view BBC as a good investment for those who want high-risk and high-reward exposure to a sector that continues to become more popular among investors. BBP is better suited for investors interested in larger-cap, less risky biotech investments.
Michael Berger, Founder and President, Technical420.com
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