Assessing The Legitimacy Of The Biotech ETF Bounce

Putting personal politics aside for a moment, it is not unreasonable to assume that investors who were long biotechnology stocks and exchange-traded funds into Election Day are happy with the outcome.

Leading up to Election Day, Democratic nominee Hillary Clinton and her harsh rhetoric against high drug prices, a worthy issue to raise against, were seen as the primary factors behind the struggles of biotechnology stocks and ETFs this year. Obviously, Clinton did not win the White House, and biotechnology ETFs responded positively to that scenario.

For example, the VanEck Vectors Biotech ETF BBH is higher by 13 percent this year. BBH tracks the MVIS US Listed Biotech 25 Index (MVBBHTR), “which is intended to track the overall performance of companies involved in the development and production, marketing and sales of drugs based on genetic analysis and diagnostic equipment,” according to VanEck.

There are always potential catalysts looming for biotech stocks and ETFs, namely drug approvals and trials and mergers and acquisitions. Next year could bring more of at least one of those two themes. Still, some investors may be concerned that biotech stocks and ETFs have rallied too far, too fast following the election.

The 'Trump Bump'

“Biotechnology’s sudden 'Trump-bump' after Election Day is not surprising. In the past year, amidst increasing political campaign pressure and Hillary Clinton’s enduring health care pricing-structure criticisms, large biotech stocks came under undue pressure and consequently experienced a sharp price decline,” said VanEck in a recent note. “The pressure eased the morning after Election Day as industry experts expect President-elect Trump’s pro-business stance to be beneficial for the biotech industry. His plan highlights business tax rate cuts from 35 percent to 15 percent, repeal of the Affordable Care Act incurred taxes on health care companies and wide-ranging cash repatriation initiatives, all three of which would potentially benefit large and profitable biotech companies.”

Holdings

The $584.4 million BBH is home to 26 stocks, a lineup that is dominated by large-cap biotechs such as Gilead Sciences, Inc. GILD, Amgen, Inc. AMGN and Celgene Corporation CELG. Those stocks combine for about a third of BBH's weight.

Good news: Those stocks and other BBH holdings are sporting attractive valuations.

“On a price-to-fair value basis, large biotech stocks traded at a 22 percent discount on average. Familiar names such as Gilead Sciences (GILD) traded at a 30 percent discount, Allergan (AGN) 29 percent and Amgen (AMGN) 25 percent compared to their respective fair value estimates,” added VanEck.