The BioShares Biotechnology Clinical Trials Fund seems particularly intriguing, if not a bit scary given that a small biotech company whose product receives a thumbs down from the FDA typically sees its stock get pummeled.

“Companies in the BBC fund are developing the lifesaving medicines of tomorrow, and some of these companies will have clinical data and FDA approvals which will result in massive stocks movements,” says LifeSci Index Partners CEO Andrew McDonald. “On the other hand, if their products fail in development, they move massively to the down side. From that perspective, it’s a more volatile, high risk/high reward fund.

“But the fact is some of these companies will succeed and bring their drugs to market, and they’ll eventually migrate to the BBP,” he adds.

Holdings in the respective indexes that underlie the BBC and BBP funds must have minimum market capitalizations of $250 million, have demonstrated institutional backing and have a minimum average daily volume of $1 million. In addition, both indexes are equal-weighted.

The BBC fund has 68 stocks and the BBP fund has 36 stocks. Regarding the therapeutic focus of the funds, McDonald says oncology is the largest sector––about 38 percent of the companies in BBC are focused on cancer drugs and roughly 28 percent of the companies in BBP have an oncology product on the market.

Other sizable focus areas for the funds include infectious diseases, genetic diseases and neurology.

McDonald notes the average weighted market cap of the BBC fund is about $1.2 billion, while the average weighted market cap of the BBP fund is almost $18 billion. Holdings in the latter fund range from Gilead Sciences, a nearly $154 billion market cap company noted for its blockbuster hepatitis C drugs, to relatively small companies with market caps close to the portfolio’s $250 million minimum.

Hot Sector
The biotech sector––as measured by the NYSE Arca Biotech index––has been on fire with average annualized returns of more than 47 percent during the past three years. It was up nearly 41 percent year-to-date as of yesterday, despite last week’s mild sell-off.

It’s enough to make investors wonder whether the BioShares funds are launching just as biotech stocks are ripe for a pullback. Earlier this year the NYSE Arca Biotech index plummeted nearly 20 percent during a seven-week stretch from late February through mid April before bouncing back with gusto. And in July, Federal Reserve chief Janet Yellen said valuations among small-cap biotech and social media stocks appeared to be “substantially stretched.”

But the team at LifeSci Index Partners believes those concerns are misplaced, at least for the sector as a whole.