Biotech Boom Ahead? Key Stocks and ETFs to Watch Now

September 23, 2024 at 11:11 AM EDT

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As a new regime and phase begin for the market and economy, after the FED cut interest rates by a surprising 50bps last Wednesday, several new opportunities and sector bull and bear markets might begin.

The biotech sector looks primed for a potential momentum shift and significant breakout, which some might deem long overdue. This sector, represented well by popular ETFs such as the XBI and IBB, has been flirting with major higher timeframe resistance for several months and is on the cusp of a potential breakout.

So, might now be the moment for the sector to play catch up to the rest of the market? Could the biotech breakout trade be among the most popular and attractive in the final quarter?

Let’s take a closer look.

Why Rate Cuts Matter for Biotechs, Especially

The Federal Reserve's 50 basis point rate cut on Wednesday significantly boosts biotech companies, especially those in the early stages of product development. These firms often rely heavily on external funding to support costly research, clinical trials, and operations.

Lower interest rates reduce borrowing costs, making it easier for biotech companies to access the necessary capital. This not only extends their financial runway but also reduces the pressure on funding, allowing biotech investors to see their investments stretch further.

Additionally, lower rates tend to improve market sentiment, encouraging more risk-taking and long-term investment. For a sector like biotechs, which demands patience but offers high potential returns, the rate cut could accelerate growth and increase opportunities for both companies and investors.

Biotechs Are Flirting With Major Resistance

The sector, represented by the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB), which seeks investment results that correspond generally to the price and yield performance of the NASDAQ Biotechnology Index, is trading near its 52-week highs and significant breakout level.

Zooming out, on a daily or even three-year weekly chart, the $150 level for the IBB shines through across multiple timeframes as a major inflection area. If the IBB can break through this area and see buyers firmly step up to continue buying and support the breakout, a significantly higher timeframe shift would have been confirmed. As of Friday’s close, the IBB was just 1.7% away from this area, which is a 52-week high.

ETFs vs. Individual Stocks: 3 Leading Biotech Investment Options

iShares Biotech ETF Offers Sector Growth With Low Fees

The iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) is a popular choice for a well-rounded, diverse approach to gaining sector exposure. The sector ETF’s top holdings include heavy giants such as Gilead Sciences, Amgen, Regeneron, and many other household names in the industry. The ETF has an aggregate Moderate Buy rating, 0.45% net expense ratio, and 0.27% dividend yield.

SPDR S&P Biotech ETF: A Mid-Cap Play with Breakout Potential

The SPDR S&P Biotech ETF (NYSE: XBI) seeks to closely match the returns and characteristics of the S&P Biotechnology Select Industry Index. The ETF has less concentrated holdings in mega-cap Biotech stocks versus the IBB and includes many mid-cap holdings, arguably allowing for greater momentum behind breakouts. Like the IBB, the XBI is trading right at its 52-week high and major breakout level. The XBI has an aggregate Moderate Buy rating and a 0.35% net expense ratio.

Gilead Sciences Near 52-Week High, Offering Sector Exposure

Gilead Sciences (NASDAQ: GILD) is the largest holding in the IBB ETF and a biopharmaceutical giant with a $104.5 billion market capitalization. With such a significant holding in the IBB ETF and its importance and influence across the sector, investing in GILD might offer prominent exposure to the industry. Of course, investing in one stock versus a sector ETF is more risky, considering the isolated and concentrated nature of the investment. GILD, notably, has a 3.32% dividend yield and a Hold rating based on twenty analyst ratings. Like the ETFs mentioned above, GILD trades near its 52-week high and potential breakout area. However, the stock has surged significantly in recent months, up over 35% from its 52-week low. As a result, the upside potential might be weaker in GILD than in XBI.

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