New Trade for January 26th, 2022

Stocks ticked higher this morning ahead of today’s critical Fed announcement. The Federal Reserve will conclude its first 2022 meeting this afternoon with a statement from Chairman Powell. Economists expect the central bank to signal that it’s committed to fighting inflation and that it’s ready to raise the federal funds rate from zero as soon as March, with as many as four rate hikes coming this year.

 “Historically, the stock market has suffered some nasty ‘temper tantrums,’ and numerous rate hikes eventually led to recessionary bear markets,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “However, the current focus among investors may be misplaced. The stock market’s response may have less to do with timing and number of rate hikes than it does with the direction of real earnings.”

One area of the market that stocks can be found to produce 10x, even 20x returns, regardless of what’s happening elsewhere,  is biotech. Looking at the performance of the past ten years, if the biotechnology industry were a sector, it would be the best performing one. Over the past decade, biotech stocks have returned 524%. That beats every last sector, it beats the broader health care sector by 200 percentage points, and it’s nearly double the S&P 500’s total return in that same time frame.  

There’s clearly money to be made in the discovery of new treatments for anything from the flu to cancer. But biotech stocks carry substantial risk. While positive data from a drug trial could send their stocks soaring, a setback or failure can crush their returns, making them difficult buy-and-hold investments.  

Biotech ETFs offer an answer for those looking for a long-term investment in biotech with less risk. Instead of betting on individual drugs or companies, an ETF allows you to spread out risk across dozens or even hundreds of firms at a time. Today we’ll focus on an ETF that offers exposure to biotech innovators with strong potential that might get overlooked by everyday investors.

New in Biotech:

The Guardian: “New pill could spell the end of all disease.”

This pill is set to completely change the lives of millions of Americans. And because just one tiny Brisbane company has virtually monopolized this technology with 140 foolproof patents…

Investors who get in on the ground floor stand to become rich beyond their wildest dreams. [Full Story…]

The Principal Healthcare Innovators ETF (BTEC) is a promising fund geared toward finding smaller, innovative companies that might get overlooked, with a focus on active investment in early-stage R&D.

BTEC seeks out health care firms from the Nasdaq US Benchmark Index but excludes the top 150 securities by market size while also excluding companies with low trading liquidity. How it identifies “innovators,” however, might seem a little unorthodox: Specifically, it seeks out “non-earners by means of having negative earnings over the prior 4, prior 8 or future 4 quarters at least half of the time.”  In other words, it selects companies with inconsistent or negative profits, the idea being that, for now, they’re pouring every last cent into R&D.

BTEC then picks the best-ranked 150 to 200 companies based on its scoring measures, then weights those stocks by size, with no stock exceeding 3% in rebalancing, which happens twice a year. At the moment, Moderna is the top, holding at 5.2% of assets by virtue of its gains since the last rebalancing. Moderna, currently best-known for its COVID-19 vaccine candidate, was founded with the intention of building a large pipeline of drugs using messenger RNA technology. Among BTEC‘s current top holding are BioMarin Pharmaceutical (BMRN), Seattle Genetics (SGEN), and Exact Sciences (EXAS).  

• Net Assets — $101.1 million

• Yield — 0.00%

• Expense Ratio — 0.42%