It’s been just over two years since the first known outbreak of Covid-19 struck in Wuhan, Hubei, China. And what seemed like a hyper-bullish case for the biotechnology sector has turned into a dud performance.
Funds like the iShares Biotechnology ETF (IBB) and the SPDR S&P Biotech ETF (XBI) have badly lagged ETFs tied to broader stock market benchmarks like the Nasdaq-100 and S&P 500. The Vanguard 500 Index Fund (VOO) has climbed 62.03% since November 2019 while IBB and XBI have gained 47.23% and 45.67% respectively.
During the same time frame, the Invesco QQQ ETF (QQQ), which tracks the Nasdaq-100, has delivered impressive results by gaining 105.79%. That’s better than double the return of major biotech ETFs.
A Healthcare Checkup
The lagging performance of biotech stocks has been a broader trend among the entire healthcare sector.
Since the start of Covid-19, the Health Care Select Sector SPDR Fund (XLV) has lagged S&P 500 ETFs with a gain of just 57.88% compared a 62% increase. XLV’s biggest sub-industry exposure includes pharmaceuticals (27.89%), healthcare equipment (22.43%) and healthcare providers and services (20.78%). Biotech stocks represent just 13.43% of XLV’s exposure, which means larger sub-industry groups have weighed more on XLV’s lackluster results.
The global pandemic continues to put immense pressure on the healthcare sector. Spiking hospitalizations coupled with bed and staffing shortages has put the healthcare system on the brink. Moreover, the inefficient distribution of testing kits has complicated matters in slowing the spread of the virus along with new strains.
Silver Lining
Biotech stocks have a boom-bust history with periods of wonderful performance followed by underwhelming results and vice versa. And while the current bust may seem unappetizing, the biotech sector is a resilient group.
The performance of IBB and XBI sizzled during the 10-year period from 2007-2017 following the Great Financial Crisis. XBI gained 475.68% while IBB jumped 320.94% compared to a gain of just 136% for the S&P 500.
Looking ahead, the biotech sector has plenty of innovation in its back pocket that could drive corporate revenue and future share prices. The emergence of mRNA technology to combat Covid-19 is just one example.
"mRNA vaccines represent a promising alternative to conventional vaccine approaches because of their high potency, capacity for rapid development and potential for low-cost manufacture and safe administration," according to research co-authored by Michael J. Hogan of the Department of Medicine at the University of Pennsylvania.