Niche Bets in Biotech

03/10/2016 9:00 am EST

Focus: ETFs

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Biotech is a very hot and interesting sector, and it has become known in recent years for its potential for powerful growth, asserts Doug Fabian. In his Weekly ETF Report, he looks at two niche-focused biotech ETFs.

BioShares Biotechnology Products ETF (BBP) sets itself apart from the pack as a biotech offering that’s just a bit different from anything else on the market.

BBP buys shares of companies that already have successfully completed multiple human clinical trials and have received FDA approval to sell and market a drug.

BBP owns shares in “products stage” companies that are not vulnerable to the risk that clinical trial failures could doom their business prospects, unlike start-ups that might need successful clinical trials to survive.

The fund has an expense ratio of 0.85%, which is on the expensive side for an ETF, but it does offer a 1.65% current yield.

Although the fund’s current price is quite depressed, when global stock markets recover, this fund could be a major beneficiary.

On the other end of the spectrum, BioShares Biotechnology Clinical Trials Fund (BBC) invests in companies that are pursuing clinical trials.

The ETF lets investors tap into that promise but it also requires accepting additional risk and volatility along the way.

Thus, while BBP is backing biotech companies that are somewhat established, the sister fund, BBC, is targeting high-potential, high-risk start-ups.

One of the big advantages of investing in BBC rather than individual biotech start-ups is that the ETF allows an investor to hedge the risk that many of the clinical trials will fail, while the successful trials of other biotech companies included in the fund can lift its overall performance.

Similar to BBP, BBC has an expense ratio of 0.85%, which is on the expensive side for an ETF.  

One caveat: the smallish size of these ETFs -- net assets for BBC are $15.5 million and for BBP, just $17 million -- puts these beneath my recommended threshold for investment.

However, the specialty focuses of both of the strategies underlying these ETFs make them investment ideas that are worth bringing to your attention.

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