Healthcare innovation and biotechnology are standing out right now as areas with a lot of promise for investors. September’s rate cut has brightened prospects, while R&D, boosted by AI, is driving new drug discoveries. Health and biotech ETFs and investing could make for a worthwhile consideration as equities uncertainty rises. Amid that interest, investors may want to consider how active investing can outperform passive biotech approaches to life sciences in some key ways.
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While the popular perception of biotech may be lab-coat-wearing men and women looking through microscopes at germs and viruses or data sets, the reality is quite different. New analysis from T. Rowe Price emphasizes that biotech has come a long way since the mapping of the human genome two decades ago. Today, as identified by investment analyst John Hall,., four major modalities are helping increase drug discoveries in biotech. Those modalities include gene therapy, gene editing, oligonucleotide therapies, and targeted protein degradation.
What do those entail? Gene therapy looks to address the serious health issues that happen with even one error in DNA sequences. By altering viruses, scientists can deliver healthy versions of those incorrect genes.
Gene editing relies on CRISPR techniques to cut gene strands and edit in new genes or alter sections as needed. Oligonucleotide therapies focus on adding synthetic DNA or RNA to alter protein production. Finally, the intriguing targeted protein degradation approach uses the cell’s “natural quality control mechanism” to address damaged proteins, often produced by gene issues.
Those modalities offer new drug potential in areas as varied as Alzheimer’s and heart disease. Rate cuts make the borrowing required to fund that R&D before drug revenues come in easier, as well, while also boosting the M&A activity that helps biotech investments thrive.
Active management, relying on deep analyst expertise, can outperform passive by finding the firms with the most promising outlooks. Perhaps more important, however, is active’s ability to combat index performance dispersion. As pointed out by Hall, the S&P Biotechnology Select Industry Index had lost up to about 10% of its trailing 12-month value, as of June 30 this year. Despite that, the top 10 therein provided returns averaging 145%.
Active healthcare and biotech ETFs can focus on those strong performers while avoiding the names that bring down their index funds. Looking ahead, with equities overall growing more uncertain, drug R&D can provide an important opportunity for upside. The T. Rowe Price Health Care ETF (TMED ) provides exposure to healthcare names that include some powerful biotech names. Charging 44 basis points, the fund could intrigue with its fundamental research-driven active approach.
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