Biotechnology stocks have soared this past year - the iShares Nasdaq Biotechnology Index Fund (NASDAQ:IBB) returned an impressive 34% in 2014 - so it's not surprising that companies are stepping up their biotech offerings in order to take advantage of current demand. One of those offerings that hit the market in just the last week is attempting to differentiate itself by targeting a very unique niche of the market.
The BioShares Biotechnology Clinical Trials ETF (NASDAQ:BBC) invests in biotech firms with a primary product offering that is in a Phase 1, Phase 2 or Phase 3 clinical trial stage of development. According to the fund's fact sheet:
Clinical trials stage companies are typically younger, smaller companies which do not have a drug approved but instead focus on testing their experimental drug candidates in human clinical trials.
While many biotech focused ETFs invest in these types of firms, this is believed to be the only ETF out there that focuses on these types of companies.
Most biotech ETFs tend to be more heavily weighted towards the big established names. In the aforementioned iShares Biotechnology Index Fund, every one of the top nine holdings in the ETF which happens to include over 53% of the ETF's total assets fall into the Large Growth Morningstar style box. These top holdings include titans like Biogen (NASDAQ:BIIB), Celgene (NASDAQ:CELG) and Amgen (NASDAQ:AMGN).
That's fine if you want broad exposure to the biggest and baddest names in the sector but it doesn't do you much good if you want to invest in the little guys who are trying to break out in the sector or have a promising new drug in the pipeline. Researching and investing in these names individually can be cumbersome, costly and very risky. Being able to invest in a broad basket of these types of companies (the fund has 68 holdings in all) represents a niche that could really appeal to investors. Top holdings in this ETF currently include Sage Therapeutics (NASDAQ:SAGE), Infinity Pharmaceuticals (NASDAQ:INFI) and Prothena (NASDAQ:PRTA).
The fund is still in its infancy but initial signs are positive. The fund has a mere $3M in assets, but it does trade around 35,000 shares a day currently, so liquidity is slowly becoming less of an issue. Plus, investors need to consider the risk in an ETF such as this. Given that these companies have no actual product sales and just experimental drugs in the pipeline, they're essentially boom or bust propositions and should be considered risky.
It's easy to trade individual stocks when they're well followed and well researched but an ETF is perfect for a niche product such as this. The 0.85% expense ratio isn't particularly onerous considering you've got biotech specialists managing the product for you.
Given biotech's current popularity and the fact that there doesn't appear ETF offering exclusive exposure to these clinical trial firms, this ETF should have some success carving out a special niche for investors.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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