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Popular biotech ETF First Trust NYSE Arca Biotechnology Index Fund (NYSE Arca: FBT) is up 23.5% on the year. It's among our top performing picks for year-to-date performance from our "stocks to invest in" list.
The rally in this particular biotech ETF is an important signal for the sector. It shows there's stability in biotech's 2015 rise.
You see, many of the sector's biggest gainers often come from smaller companies.
Small biotechs are volatile and tied heavily to federal regulatory activity. It's one step after another for a small pre-clinical firm to get the Feds on board with a drug they're trying to market. A step ahead in the regulatory process can help boost stock prices dramatically overnight.
"There are a lot of regulatory catalysts that can drive the price up very suddenly because people get giddy about the profits they can make," Money Morning Biotech Investing Specialist Ernie Tremblay said. "If for example, you have a Phase III data release on a particular drug that's going to treat various diseases that can't be treated currently, you'll generally see a rapid rise in share price."
Just look at a company like Puma Biotechnology Inc. (NYSE: PBYI). On July 23, 2014, Puma announced positive results of its Phase III clinical trial, the last phase before a drug or treatment can be made marketable, for a breast cancer drug. In one day, the stock shot up from $59.03 to $233.43 – a 295.4% gain in a single day.
But a step back produces the opposite effect. Any apparent Food and Drug Administration disapproval can devastate share prices.
So it's easy to see why a handful of smaller biotechs breaking out would not be a ringing endorsement for the sector as a whole. After all, their share prices are tied to the fickle ebb-and-flow of a regulatory process that is all but certain. Any surge can be undone.
And the spate of small surging biotechs, of which our top 10 stocks to invest in features a few, could just be the work of intrepid investors looking to pump up a smaller, more sensitive subsector.
But instead of a slew of hypersensitive stocks subject to one-time upward price gains carrying the sector, it's a wide-range of firms.
2015 Biotech ETF Surge Reflects Healthy Sector
The FBT is a broad exchange-traded fund of 31 companies. While its holdings do include smaller companies like the red-hot Novavax Inc. (Nasdaq: NVAX), up 63.7% on the year, it also tracks biotech as a whole.
Larger firms are more established. They aren't as subject to the violent upward price swings. They can rely on revenue from sales of their existing drugs, as opposed to crashing in on the biotech scene with a revolutionary treatment after years of R&D.
And thus far this year, it looks like they've added a reliable boost to the biotech ETF rally in 2015.
Across the board biotech is having a great 2015. This is following a year where the iShares Nasdaq Biotechnology ETF (Nasdaq: IBB) had already soared 33.8%.
This year the rally spans across all different subsectors and firm sizes.
You have Novavax, a smaller vaccine maker, up 63.7%. Then there's Lannett Co. Inc. (NYSE: LCI), a generic drug vendor up 60.7%. And then there are the big names like Biogen. Biogen saw its stock surge as much as 8% today (Friday) on positive developments for an Alzheimer's drug.
Investors see the value of companies that provide solutions for the most pressing global health issues.
And the gains in the sector run the gamut. It's not just a collection of smaller firms getting a boost from various regulatory catalysts. It's firms of all shapes and sizes appealing to the investing public for what the sector brings to the market.