Good Reasons to Stick With Biotech ETFs

This article was originally published on ETFTrends.com.

The iShares Nasdaq Biotechnology ETF (NASDAQGM: IBB), the largest biotech exchange traded fund by assets, tumbled alongside the broader market in February. In fact, IBB's February loss surpassed those of the S&P 500 and diversified healthcare ETFs.

There are supporters of the biotech space. 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.

“There are several reasons as to why the sector took a breather. Valuations were part of it: Biotech stocks had such a good run for so long that valuations were stretched and some investors started taking profits. But two things had an even bigger impact on prices: politics and cycles,” according to Morningstar.

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.

IBB tracks the Nasdaq Biotechnology Index and holds nearly 160 stocks. Biogen Inc. (NASDAQ: BIIB), Amgen Inc, (NASDAQ: AMGN), Gilead Sciences Corp. (NASDAQ: GILD) and Celegene Inc. (NASDAQ: CELG) combine for a significant percentage of the fund's weight. Those are four of the largest biotechnology companies in the U.S.

Helping the sector's prospects is a speedier approval process by the U.S. Food and Drug Administration. In 2012, the FDA was given the authority to designate certain drugs as a 'breakthrough therapy,' which then allowed that drug to move through the approval processes more quickly,” said Morningstar.

The White House is also looking to help the Food and Drug Administration (FDA) expedite new drug approvals, which could serve as a major catalyst for the biotechnology space.

“As well, demographics in America--more people are getting older--and emerging-markets countries getting better access to medicine should also keep business booming for the foreseeable future,” said Morningstar.

ETF traders who are betting big on the biotechnology sector rebound have also utilized leveraged long options including the Direxion Daily S&P Biotech Bull Shares (NYSEArca: LABU), which takes the 3x or 300% daily performance of the S&P Biotechnology Select Industry Index.

For more information on the biotech sector, visit our biotechnology category.