Biotech ETFs Have Room to Run, with Several Catalysts Ahead

Biotech pillsThe iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB) has recovered nicely from its yearly lows, and there’s reason to believe that more gains are on the horizon as well.

That’s because of a continued flurry of M&A activity, along with a very strong pipeline of new cutting edge treatments from smaller biotech firms slated to hit the market soon, writes analyst Michael Brush:

It’s no secret that big drug companies have weak pipelines. But they have the cash to correct this problem by purchasing pipeline-rich companies. They’ve been deploying this cash, making biotech investors rich overnight. You can expect a lot more of the same.

What’s more, the space is shaking off recent bearish comments from Hillary Clinton, who has seemed to soften on her drug pricing stance lately:

Biotech stocks have been shrugging off the damage Clinton caused a year ago with her now infamous tweet that lambasted aggressive drug pricing. Her tweet shaved billions of dollars off the group in an instant.

The absence of a drug-pricing polemic in the first debate is a signal the issue has moved a bit lower on the campaign agenda. If so, this means the healthy biotech rally since late June may well continue — with the normal volatility for the group, of course.

Wall Street analysts are coming back around to the sector as well:

“With a data-filled fourth quarter ahead and mergers and acquisitions fervor seemingly reinstated, we’re uncharacteristically optimistic,” says Brian Skorney, a biotech analyst at Baird, who’s worth following because he has made several good calls on stocks and the sector.

When the factors of M&A, breakthrough treatments, waning political pressure, and increasingly bullish Wall Street sentiment align like they are now, investors should stand up and take note. Rather than taking on the risk of owning single biotech names — which can be exceedingly volatile — investors can instead put cash to work in Biotech ETFs instead. The most popular choice in this arena is the IBB (see chart below), but the SPDR S&P Biotech ETF (XBI) is a solid choice as well.

IBB-2016-09-30

The IBB fell $1.12 (-0.39%) to $284.75 in Friday morning trading. Year-to-date, the largest biotech ETF by assets, with over $7.5 billion under management, has fallen 15.87%.