Post-Pandemic Stars Could Align For This Biotech ETF

These days, it's not hard to find winners among health care exchange-traded funds and that's true of both established and rookie players.

What Happened: Obviously, the primary catalyst driving many health care ETFs this year, particularly biotechnology and pharmaceutical funds, is the fight against the coronavirus. Still, investors evaluating biotech ETFs today need to ensure the funds they're considering will be viable in a post-pandemic world.

The First Trust NYSE Arca Biotechnology Index Fund FBT, one of the largest biotech ETFs by assets, is an example of a fund from this category that is viable today and should continue delivering for investors after COVID-19 is defeated.

Why It's Important: Up 10.64% year to date, the $2.18 billion FBT follows the NYSE Arca Biotechnology Index. Relative to some rivals, the fund's performance this year is subdued because Moderna MRNA isn't among its 30 holdings and its overall coronavirus exposure is low. However, that doesn't diminish the long-term thesis for the fund.

“The COVID-19 crisis has further stimulated improvements in regulatory efficiency, representing one of the most important long-term consequences of the crisis for biotechnology companies, in our view,” said First Trust in a recent note. “The urgency of the crisis forced regulators to reevaluate potentially outdated methods and consider new ways to streamline clinical trials. In the years ahead, these adaptations may enable biotechnology and other health care companies to bring new products to market more quickly, improving outcomes for both patients and shareholders.”

That's good news for FBT because while the ETF isn't the most direct play on COVID-19 testing and vaccine development, many of its member firms have robust pipelines and are working innovative therapies that could benefit patients and investors.

What's Next: Consolidation is often a credible consideration when evaluating biotech ETFs and the pandemic is cementing that notion.

“Over the past several months, numerous companies have entered into new partnerships, seeking to accelerate innovation and leverage one another’s strengths,” according to First Trust. "As they discover the benefits of these synergies, some may choose to make them more permanent via mergers & acquisitions. While near-term liquidity needs could delay certain deals from being proposed, several large health care companies have ample cash to consider such transactions, in our opinion. The ten largest pharmaceutical and biotech companies in the S&P 500 held an average of $10.7 billion in cash on their balance sheets, as of 6/9/20.”

That's another positive for FBT because plenty of its components are qualified buyers and plenty are legitimate targets.