This Baby Biotech ETF Has Big Potential

The Defiance Nasdaq Junior Biotechnology ETF IBBJ is the newest addition to the biotechnology exchange traded funds fray, having debuted about a month ago.

What Happened: A biotech ETF coming to market in the midst of a global pandemic could prove to be a case of good timing for multiple reasons. First, some of IBBJ's more than 175 components have exposure to the coronavirus vaccine competition. Second, the fund addresses the small-cap segment, one that's under-served in the biotech ETF space.

The new ETF tracks the Nasdaq Junior Biotechnology Index (NBIJR), the small-cap offshoot of the widely followed Nasdaq Biotechnology Index.

Why It's Important: IBBJ's underlying index launched on April 30 so it has a few more months of activity in the COVID-19 environment that investors can evaluate as a possible template for how the fund could perform as vaccine developments evolve.

“The majority of constituents in the top 15 have seen positive YTD returns in the context of the Coronavirus pandemic, with an average YTD return of nearly 86% as of June 30, 2020,” according to Nasdaq Global Indexes.

IBBJ's top 15 holdings combine for about 15% of the ETF's roster. Only Immunomedics IMMU at 3.4% exceeds a weight of 3%. Various market capitalization data pertaining to IBBJ holdings confirm the new ETF is useful for investors that want to access the growth potential of small-cap biotech equities without the burden of stock picking in what can be a difficult group to navigate.

“In terms of market capitalization for the overall group, the average was $2.0bn, while the weighted average was $3.5bn. Conversely, the median was only $1.2bn. This is reflective of the substantial representation of smaller stocks in the index, with 80 components under $1bn of market cap comprising 14% of the index weight,” according to Nasdaq.

Conversely, 40% of the Nasdaq Biotechnology Index is allocated to companies with market values of $50 billion and higher.

What's Next: Amid concerns about the coronavirus vaccine timeline, IBBJ is struggling out of the gates, but those declines could give way to longer-term opportunity, particularly because many of the ETF's components aren't levered to the COVID-19 trade.

What makes IBBJ compelling for risk-tolerant investors is that many of the fund's holdings are early-stage, research and development (R&D) intensive companies. That combination has a history of delivering big gains in the biotech space.

“Even for those that did report some level of sales, 73 (more than 40% of the constituent count of the index, totaling nearly 47% of the index weights) of them recorded R&D expense that exceeded their revenues – clearly an indicator of the unique business models at play in the space,” notes Nasdaq.