The BioShares Biotechnology Products Fund (Nasdaq: BBP) attempts to reproduce the investment results, before fees and expenses, of the LifeSci Biotechnology Products Index. This index is focused on the common stock of U.S. exchange-listed biotechnology companies with a product offering or candidate (i.e., a lead drug) approved by the U.S. Food and Drug Administration.

The BioShares Biotechnology Products Fund is an exchange-traded fund (ETF) released by BioShares in December 2014 as part of a two-fund concept. The idea was to separate biotechnology and pharmaceutical companies into competing camps: those with an approved drug from the FDA and those with a drug still in the FDA trial process. The BioShares Biotechnology Clinical Trials Fund is the corresponding ETF.

The inclusion restrictions for the BioShares Biotechnology Products Fund require at least $200 million in market capitalization for inclusion in the underlying index. It is standard for the fund to track between 40 and 50 different stocks.

The top five holdings in the portfolio include Anacor Pharmaceuticals at 5.02%, Exelixis at 4.36%, Kythera BioPharmaceuticals at 3.14%, Progenics Pharmaceuticals at 3.02% and Celgene at 2.97%. There is no international exposure in the BioShares Biotechnology Products Fund, and there are no debt securities, either. All of the holdings consist of U.S.-listed stocks in the broader health care sector.

Characteristics

The BioShares Biotechnology Products ETF is issued by ETF Issuer Solutions as an open-ended investment fund. The underlying index is equal-weighted and uses a proprietary methodology.

BBP is a passive ETF, which means that its fund managers are not particularly active about making trades, rebalancing or shifting investment strategy. Rather, BBP is focused on reducing costs and preventing market timing risk.

However, BBP is still considered an expensive fund. Its expense ratio is set at 85 basis points (0.85%), which is almost double the category average rate (0.46%). The universal average for ETFs in all sectors is 60 basis points. Fund expense ratios do not take into consideration brokerage fees or other trading costs.

As of mid-2015, there were only 39 funds in the portfolio, placing BBP on the lower end of ETFs in the category. Total net assets run in excess of $31 million, which is also considered small. There are some liquidity concerns with BBP; a bid-ask spread of 0.27% limit its effectiveness as a speculative trading tool.

Suitability and Recommendations

The BioShares Biotechnology Products Fund is an interesting choice for investors who are looking for exposure to the health care sector or who are looking to take a calculated risk on the future of major drug companies. This industry has seen major changes with the Affordable Care Act of 2010 and a series of mergers and acquisitions (M&As). The global population is getting older, which most drug companies hope to capitalize on.

There are also risks associated with BBP's health care exposure. Most notable is the fact that all of the funds assets are tied to a small subset of the health care industry. Investors face a serious lack of sector diversification with this ETF, which might cripple its chances of maintaining a core spot in a long-term portfolio.

The average drug takes more than a decade and upwards of $1 billion to pass FDA trials and receive approval. If the company cannot market and sell its product effectively after entering the market, those expenses might never be recouped.

Other risks include stock market risk – ETFs trade like stocks – and infant fund risk. There is very little track record for BBP, which leaves many investors skittish. There are also significant regulatory risks involved; BBP depends highly on the efficacy and stability of the FDA.

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