MF3d
~ by Snehasish Chaudhuri, MBA (Finance).
In my last coverage of VanEck Biotech ETF (NASDAQ:BBH) on April 28th, I noted that BBH:
“…will be able to post respectable price growth by the end of 2022, as the ETF seems undervalued, and the major holdings of this ETF have started recording significant price growth.”
The ETF is up 12% since that article, which I would call respectable in an otherwise stale market. BBH has strong fundamentals, and has GENERALLY performed well in the medium and long term. I opined that BBH, if bought at the correct price, is an excellent long term hold.
BBH invests in U.S.-based healthcare stocks primarily in the biotechnology and life sciences sectors. I was extremely bullish about this fund last time. However, since my last coverage, stock markets worldwide have gone through a rough patch. S&P 500 fell by 0.6 percent during the past 6 months, and 14.5 percent during the past one year. Russia’s invasion of Ukraine has resulted in a spike in inflation, and resulted in interest rate hikes. The Federal Reserve hiked the interest rate 5 times by a total of 3.5 percent. Inflation, and interest rate hikes usually have an inverse effect in equity markets, and equity funds. Thus, it’ll be interesting to find out how VanEck Biotech ETF has performed since April 28th, 2022.
While The Broader Market Performed Poorly, VanEck Biotech ETF Stood Out
VanEck Biotech ETF is an exchange-traded fund (“ETF”) launched and managed by Van Eck Associates Corporation. It replicates the portfolio of MVIS U.S. Listed Biotech 25 Index. The Biotech 25 Index includes common stocks and depositary receipts of U.S. exchange-listed companies in the biotechnology and life sciences industry. BBH has a low expense ratio of 0.35 percent, which is good. The fund has an asset base of approximately $520 million. Though the fund has been paying dividends since 2000, the yield has been marginal, and the payout is only once a year. So, this fund is not meant for income-seeking investors. However, the fund proved to be a good option for growth seeking investors. It grew by more than 13 percent during the past six months.
The total return over the medium and long term has been impressive, too. Annual average total return over the past 3 years and 10 years have been 7.9 percent and 12.2 percent, respectively. In my last coverage seven months back, I mentioned that:
“this ETF has been much more successful since the COVID-19 pandemic period market crash than its price performance over 2018 and 2019. During that period, VanEck Vectors Biotech ETF had to feel the pinch of another major backlash in the US stock market due to higher tariff, interest rate hikes, and tax cuts in the economy. Incidentally, this ETF was trading within a range of $135 to $145 in the past 100 days just before the pandemic period market crash in mid-March, 2020.”
The same pre-pandemic price range was witnessed almost six months back. As I expected, the BBH price started moving upwards after reaching that pre-pandemic level. It is currently trading around $170.
BBH’s Portfolio of Large-Cap Biotechnology Stocks Delivered Strong Growth
Six months back, almost 80 percent of BBH’s entire fund was invested in 14 large-cap biotechnology and life sciences stocks – Amgen Inc. (NYSE:AMGN), Moderna (NYSE:MRNA), Gilead Sciences Inc. (NYSE:GILD), Vertex Pharmaceuticals Inc. (NYSE:VRTX), Illumina Inc. (NYSE:ILMN), Regeneron Pharmaceuticals Inc. (REGN), IQVIA holdings Inc. (NYSE:IQV), Biogen Inc. (NYSE:BIIB), Seagen Inc. (NYSE:SGEN), BioNTech SE (NYSE:BNTX), Bio-Techne Corp (NYSE:TECH), Alnylam Pharmaceuticals Inc. (NYSE:ALNY), BeiGene Ltd. (NYSE:BGNE), and ICON Public Limited Company (NYSE:ICLR). VanEck Biotech ETF has continued with the same set of stocks over the past eight months.
The fund increased its investments in another 6 stocks – argenx SE (NYSE:ARGX), BioMarin Pharmaceutical Inc. (NYSE:BMRN), Qiagen N.V. (NYSE:QGEN), Repligen Corporation (NYSE:RGEN), Incyte Corporation (NYSE:INCY), and Charles River Laboratories International, Inc. (NYSE:CRL). During the past six months, the price of BMRN grew by 40 percent, ARGX grew by 30 percent, RGEN grew by 15 percent, QGEN grew by 12.3 percent, and INCY grew by 8.4 percent. Price of CRL witnessed a marginal drop. So, enhancing stakes in these 6 stocks has worked well for VanEck Vectors Biotech ETF.
Among its existing investments, ALNY, BIIB, BGNE, GILD, MRNA and VRTX – all grew by more than 20 percent during the past 6 months. ALNY posted a growth of 77 percent, while BIIB grew by 50 percent. REGN and AMGN grew by 15.4 percent and 13.3 percent, respectively. These 8 stocks accounted for almost 60 percent of its entire portfolio. So, an overwhelming percentage of BBH’s portfolio has outgrown the broader market during these 6 months. Altogether, these 20 biotechnology stocks constitute 96 percent of the entire portfolio. The performance of its major holdings also got reflected in the price performance of BBH, and the fund is trading almost at par with its net assets value (“NAV”).
Investment Thesis
I found VanEck Vectors Biotech ETF to be undervalued during my last coverage, and expected its major holdings to post significant price growth. BBH did post strong growth over the past six months, at a time when the broader market had failed to generate positive growth. BMRN, ARGX, ALNY, BIIB, BGNE, GILD, MRNA RGEN, QGEN, VRTX – these 10 stocks constituting almost two-thirds of the entire portfolio registered high double digit growth. This ETF also generated strong growth over the medium and long term. The only drawback is that this fund generates a very low yield, which is less than 0.5 percent.
VanEck Vectors Biotech ETF is trading much higher than what it was during the pre-pandemic period. The price multiples are also quite close to its peers. The fund is trading at a price to earnings (P/E) ratio of 18.9, and price to book (P/B) ratio of 4.13. I believe that the fund will become stable now, and thus expecting a huge price growth will not be a wise idea. However, the fund will still continue to generate growth, as its portfolio of large-cap biotech stocks will continue to grow. I’d thus suggest investors hold the BBH fund for a longer period of time in order to realize its full potential.
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