Hey, Junior: New Biotech ETF Goes Small In Search Of Big Winners

With significant help from the fight against the coronavirus, biotechnology stock and exchange-traded funds are setting torrid paces this year.

What Happened: This year notwithstanding, one thing the biotechnology space has a history of is small stocks providing jaw-dropping gains. Even with that compelling history, only a small number of ETFs provide adequate exposure to small- and mid-cap biotech equities.

A new kid on the block, the Defiance Nasdaq Junior Biotechnology ETF IBBJ, is broadening that group. IBBJ debuted on Tuesday and is the third ETF in the Defiance suite, though the issuer has a couple of more products in its pipeline.

Why It's Important: The new IBBJ follows the Nasdaq Junior Biotechnology Index, the small stock offshoot of the widely followed Nasdaq Biotechnology Index. IBBJ's underlying index only includes companies with market values of $5 billion or less at the time of inclusion.

The index, which is home to 176 stocks, requires a minimum market capitalization of $150 million and average daily dollar volume of at least $100,000. As history proves, there are some obvious reasons why investors may readily embrace IBBJ and those reasons extend beyond the current coronavirus environment.

“Junior biotech companies, with a market capitalization that is less then $5 billion, have the potential advantage of a Food and Drug Administration more receptive to new cutting-edge and rare-disease therapies,” according to Defiance. “They are possibly also strengthened by increased patient lobbying and greater willingness by insurers to pay for treatments. Combined with the potential for mergers-and-acquisitions and the U.S. government’s recent gigantic Covid-19 aid to small and mid-sized companies, small-caps seemed likely to lead the domestic recovery.”

What's Next: IBBJ's debut extends what's recently been a busy stretch of new and unique health care ETFs coming to market. The latest Defiance ETF is at least the fourth health care ETF to launch since late June.

IBBJ components are “engaged in biotech research and development, the sale or licensing of biological substances for the purposes of drug discovery and diagnostic development; and pharmaceutical manufacturers of prescription or over-the counter drugs, including vaccines and development and manufacturing companies,” according to the issuer.

Several of the new ETF's holdings offer coronavirus vaccine exposure, indicating it could be a well-timed launch. IBBJ charges 0.45% per year, or $45 on a $10,000 investment.