Once stalwarts of the healthcare investing realm, biotechnology stocks and related ETFs have been laggards going back to 2021. That’s a lengthy run of disappointment that’s given some investors pause about embracing the space.
Still, it’s hard to deny biotech’s history as an innovative growth industry. And it has the potential to improve both patient outcomes and portfolio performance. With those positives in mind, some investors may want to access biotech funds in nondedicated fashion. The Invesco NASDAQ Future Gen 200 ETF (QQQS ) could be an idea to consider.
QQQS allocates nearly half its weight to healthcare stocks. And in the conversation regarding the sector’s investment thesis, the Invesco ETF is pertinent because it’s a small-cap fund. And small-cap plus healthcare often equals biotech.
QQQS Worth Considering
To its credit, QQQS has participated in the recent small-cap resurgence, gaining 14.29% over the 90 days ending Nov. 5. That could be the foundation of more extended upside should smaller biotech stocks break out of their now extended period of consolidation.
“However, if you scroll back and look at the long-term charts, you can see that the way biotech behaves is quite unique. It tends to go through a boom and then consolidation, and then a boom and then consolidation,” noted Alisa Craig of Schroders.
Looked at another way, it’s not surprising that biotech stocks have experienced a period of lethargy, but the current one is lengthy. That implies investors are waiting on the next big thing to stoke a new biotech boom. It’s up to the industry to deliver that catalyst.
“These are actual things that have happened. There’s a lot of generalist money moves into the sector. There’s a lot of excitement because it’s a new market from nothing. That’s when you get these booms. The time period that you’ve just mentioned is from an end of a boom,” added Craig.
Importantly, biotech valuations reset following the coronavirus vaccine boom. And should the Federal Reserve continue lowering interest rates in 2025, that could be another driver of upside for biotech equities and ETFs such as QQQS. Lower interest rates are pertinent to smaller biotech firms because many aren’t profitable and because their cash flows are longer-dated.
“It’s not because these companies have debt. It’s because they are long-dated assets. So the revenues and profits that they expect to have are going to be 10, 15 years away. And when you value a company, you discount those cash flows from the future to today. And if the interest rate is bigger, that number is going to end up being smaller. It’s as simple as that,” concluded Craig.
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