Morningstar Rating

ETF Research and Analysis

by Robert Goldsborough
Suitability
The jarring pace of change, single-product liability, regulatory uncertainties, and intellectual property rights make picking stocks in the biotech sector a high-risk/high-reward proposition. As such, we think investing   Read more 

Bull Case

Owning a basket of biotechs diffuses firm-specific risk, thereby allowing investors to gain access to this corner of the market without the headache of trying to accurately forecast the timing and size of future cash flows, which may never actually come to fruition.
While biotechs are notoriously volatile owing to the boom-bust nature of drug development, this ETF's diversification smooths the ride to a certain extent, reflecting the fact that one drug's odds of success are typically unrelated to another's.
Health-care reform should benefit biotechs, as Medicaid began covering more people in 2014, leading to greater patient volumes. Read more 

Bear Case

While upstart names are unavoidable in a speculative sector such as biotech, they spur high volatility. This ETF's gains can vanish as quickly as they arrive.
The fund invests in a number of firms that lack approval to market even a single drug. That makes these firms' cash flows and our fair value estimates on these stocks highly uncertain. We'd demand a healthy margin of safety to invest. Many of this fund's holdings lack competitive advantages of any kind, as they're founded on boom-bust business models that hinge on the successful development, approval, and marketing of unproven drug therapies.
Higher rebates already are in place for Medicaid patients, which are bad for biotechs because they mean biotechs see lower net prices for their drugs. Read more 

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