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4 Best Biotech Funds to Buy in Q2

Zacks Equity Research
WellCare Health's (WCG) first-quarter earnings are likely to gain from a rise in membership, partly offset by high debt load.

The biotechnology sector provided excellent returns in the first quarter. Mergers and acquisitions, initial public offerings, collaborative operations, remarkable new job additions and implementation of new technology in the biotechnology domain are some factors boosting the sector.

Investors who aren’t afraid of taking risks could find this sector highly lucrative in the coming months.

Biotech Indexes Fare Well in 2019

Major biotechnology indexes had a spectacular Q1. SPDR S&P Biotech ETF (XBI), iShares Nasdaq Biotechnology ETF (IBB), ProShares Ultra Nasdaq Biotechnology (BIB) and NASDAQ Biotechnology Index (NBI) surged 24.3%, 14.8%, 29.3% and 14.9%, respectively, in the January-March period.

Factors Boosting Biotechnology Sector

While the sector has benefited from many developments so far this year, mergers and acquisitions (M&As) have been rather prominent in changing the overall landscape of the sector. M&As are rather common in the biotechnology sector, and why not? Given the high prices involved in the research and development of drugs, M&As help companies build new platforms, cluster sub-critical businesses and fund R&D programs better.

This year has already been earmarked as another one for M&As, starting with pharmaceutical giant Bristol-Myers Squibb’s offer in January to acquire cancer drugmaker Celgene for $74 billion. Following this, Eli Lilly and Company acquired Loxo Oncology for $8 billion in February.

In addition, companies entering collaborative operations are also driving the sector. Collaborative arrangements basically refer to joint operating activities, which significantly help biotechnology companies to conduct research and drug development as well as share risks and costs.

Apart from M&As and collaborative arrangements, a notable number of initial public offerings are also boosting the biotechnology sector. In 2018 alone, the sector witnessed about 60 companies filing IPOs and raising a whopping $6.3 billion in the process. In the United States last year, biotechnology and biopharmacy startups constituted 42% of U.S. IPOs in terms of the number of deals, the highest in any sector.  

Also, new job additions in the healthcare sector are a definitive indicator of the sector’s unprecedented growth. According to the labor department’s latest report, the healthcare sector added 49,000 new jobs in March and 398,000 over the past one year.

Last but not the least, the increasing implementation of new technologies such as artificial intelligence and cloud-based applications are changing the operational structure, and research and development processes in the biotechnology sector. Drug discovery and development, monitoring patients and other functions have become faster and easier with these.

These encouraging factors make the biotechnology sector a great choice for investments and therefore, investors could consider a few biotech mutual funds. At this point, a rather vital question crosses one’s mind: Why should investors consider mutual funds?

This is because reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be their parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Our Choices

We have selected four mutual funds from the biotechnology sector that carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Fidelity Select Biotechnology FBIOX fund invests the majority of its net assets in common stocks of companies mostly engaged in the research, development and distribution of biotechnological products. The fund primarily seeks capital growth. The non-diversified fund invests in U.S. and non-U.S. companies alike. The fund has a minimum initial investment of $2500.

This Zacks sector – Health product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FBIOX carries a Zacks Mutual Fund Rank #1. The fund has an annual expense ratio of 0.74%, which is below the category average of 1.26%. FBIOX has three and five-year annualized returns of 13.5% and 8.4%, respectively.

Schwab Health Care Fund SWHFX primarily invests in equity securities of companies that are engaged in operations of the healthcare sector. The fund aims for long-term capital appreciation. The fund invests at least 80% of its assets in biotechnology and pharmaceutical companies, medical service firms, medical product manufacturers and suppliers etc. The fund has no minimum initial investment.

This Zacks sector – Health product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

SWHFX carries a Zacks Mutual Fund Rank #1. The fund has an annual expense ratio of 0.80%, which is below the category average of 1.26%. SWHFX has three and five-year annualized returns of 11.1% and 10%, respectively.

Invesco Health Care Fund Class Y GGHYX aims for long-term capital appreciation. The fund invests the majority of its assets in securities of companies that are engaged in operations in healthcare-related industries. The fund mostly invests in equity securities, depositary receipts and securities convertible into equity securities. The fund may also invest a prominent part of its assets in securities of small- and mid-capitalization companies. The fund has a minimum initial investment of $1000.

This Zacks sector – Health product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

GGHYX holds a Zacks Mutual Fund Rank #2. The fund has an annual expense ratio of 0.85%, which is below the category average of 1.26%. GGHYX has three and five-year annualized returns of 9.8% and 6.7%, respectively.

T. Rowe Price Health Sciences Fund PRHSX invests a minimum of 80% of its assets in common stocks of companies mostly engaged in research, production and distribution of products and services in the healthcare-related industry. The non-diversified fund mostly invests in mid- and large-capitalization companies. The fund has minimum initial investment of $2500.

This Zacks sector – Health product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PRHSX carries a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.77%, which is below the category average of 1.26%. PRHSX has three and five-year annualized returns of respectively 15.2% and 13.5%.

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