Biotech stocks have gotten crushed in recent weeks, with the Nasdaq Biotechnology Index falling 15.5% in the last month and 25% from its July highs.
And while many investors are taking their money to the sidelines, now is actually a great time to invest in biotech ETFs to lock in profits for 2016.
You see, recent news from the biotech sector has sparked a sell-off. First, Turing Pharmaceuticals CEO Martin Shkreli raised the price on a drug used to treat complications of AIDS and cancer from $13.50 to $750 a pill, drawing the ire of consumers everywhere.
Next, Democratic presidential candidate Hillary Clinton reacted to Shkreli's move by calling for an end to "price gouging" on specialty drugs. That announcement alone sent biotech ETFs down 5%.
The next day, Clinton released her pharma plan proposal. It calls for capping out-of-pocket prescription payments, encouraging more competition amongst pharma companies, and approving drugs from other countries in the United States.
But even with all this price controversy, Money Morning Biotech Investing Specialist Ernie Tremblay doesn't see any huge issues with the overall biotech market.
"Over the long run, I wouldn't expect any of this to cause fundamental changes in market valuations," Tremblay said.
For one, it would be extremely hard for Clinton's biotech plan to come to fruition. As Tremblay points out, only about 12% of biotech companies are actually profitable. Most of the biotech valuation we see is based on potential, rather than profits. And most new drugs are developed by small- or medium-sized biotech companies, not Big Pharma firms.
"So any plan that stands in the way of reaching profitability for 88% of the companies that are developing important, innovative new drugs has no possibility of passing," Tremblay explained. "It would simply be too destructive to the industry and to the healthcare of Americans."
"The current Clinton plan reflects some naiveté about how the drug industry works, and I would expect it would see a lot of revision before it could pass muster in Congress," he continued.
So for investors willing to stomach some of the volatility we're seeing from biotech stocks and biotech ETFs, this recent pullback presents a great buying opportunity. Here's one of our favorite biotech ETFs on the market now...
Biotech ETFs Offer Great Profit Opportunity for 2016
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
One of the top biotech ETFs we've been recommending at Money Morning is the First Trust NYSE Arca Biotech ETF Fund (NYSE Arca: FBT).
In the last year, FBT is still up 9.1%, even given the last month's sell-off. That far outpaces the broader markets as well. In the last year, the Dow Jones is down more than 5.9%. The Nasdaq is up just 1.9% in that same time.
The biotech companies that FBT invests in have a median market cap of $7.6 billion.
"That's large enough to offer stability but small enough to deliver plenty of upside," said Money Morning Defense & Tech Specialist Michael A. Robinson.
FBT offers a way to play some of the most exciting biotech stocks on the market, including the following:
- Regeneron Pharmaceuticals Inc.'s (Nasdaq: REGN) main product combats blindness in senior citizens. The company has a $47 billion market cap, and the stock has climbed 11.9% in 2015. FBT has 3.7% of its holdings in REGN.
- Celgene Corp. (Nasdaq: CELG) has several cancer drugs on the market right now, and a market cap of $84 billion. CELG stock is up 12.9% in the last year, and it makes up 3.4% of FBT's holdings.
- Gilead Sciences Inc. (Nasdaq: GILD) accounts for 3.4% of FBT's assets. GILD is best known for its hepatitis C treatments. It has a market cap of $142 billion, and the stock is up 3% in 2015.
FBT has $3.2 billion in assets and invests in 30 different biotech companies.
Follow us on Twitter @moneymorning. Like us on Facebook: Money Morning.
Protect Yourself from a Total Market Collapse: According to CIA Asymmetric Threat Advisor Jim Rickards, there are five "flashpoints" that signal the death of the U.S. dollar and a complete economic collapse in the United States. Here's how you can protect yourself, and your money, before it's too late...