It’s understandable investors are frustrated with broader measures of small-cap equities. They’ve been hearing about the possibility of smaller stocks outperforming larger counterparts for a while. That frustration is likely amplified at the intersection of biotechnology and small-caps. Small-caps were once a potent source of returns for risk-tolerant investors. A long period of subpar returns by large-cap biotech stocks has weighed on smaller equivalents. That’s prompted some market participants to gloss over the space. But there could be opportunity afoot with the following ETF.
The ALPS Medical Breakthroughs ETF (SBIO ) has recently shown signs of life. It gained 9.58% for the month ending May 13. Yes, the ETF has a way to go to trim its year-to-date loss. But the fund’s 2025 struggles belie an important point: Innovation and opportunity abound in the small-cap biotech arena.
Tailwinds Could Emerge for SBIO
Should small-cap biotech equities garner some momentum in the back half of 2025, SBIO could be a compelling choice for investors for multiple reasons. First, small-cap healthcare is a notoriously difficult market segment in which to stock-pick. That highlights one benefit of SBIO being an index-based strategy.
Second, and relatedly, active biotech managers typically are under-allocated to small-cap names due to the aforementioned difficulty in spotting the best opportunities in the space. SBIO eases some of that burden. That’s because its index mandates all components have at least one drug or therapy in Phase II clinical trials. That mitigates some of the speculation associated with stock-picking among Phase I companies or those that haven’t even advanced to the trial stage.
SBIO could derive further benefit should consolidation activity pick up. That point is often discussed as it relates to smaller healthcare stocks.
“Healthcare mergers and acquisitions have picked up notably recently as large cash-rich pharmaceutical companies face patent cliffs and are looking to backfill drug pipelines. They often pay substantial takeout premiums,” according to BNP Paribas.
Should takeover activity perk up in the healthcare sector, it could prove rewarding for SBIO. That’s because the ETF has a documented history of being home to takeover targets. The stars could soon align on the mergers and acquisitions front for SBIO.
More Widespread Vibrant M&A?
“The combination of likely rate cuts by the Fed, boardroom optimism and a measure of economic stability could lead to more widespread vibrant M&A. That would be another tailwind for small caps,” addrf BNP Paribas.
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VettaFi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for SBIO, for which it receives an index licensing fee. However, SBIOis not issued, sponsored, endorsed, or sold by VettaFi. VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of SBIO.
