Stock Analysis & Ideas

This ETF Has 67% Upside Potential, According to Analysts

Story Highlights

This Biotech ETF from State Street helps investors gain broad exposure to a high-risk, high-reward sector of the market that harbors explosive potential.

Investors are always on the lookout for opportunities with considerable potential upside, and an ETF that analysts collectively view as having nearly 70% upside potential from current levels is the SPDR S&P Biotech ETF (NYSEARCA:XBI).

Analysts are Bullish

XBI is part of the popular sector SPDR ETFs from State Street Global Advisors. The fund seeks to replicate the performance of the underlying S&P Biotechnology Select Industry Index before expenses and fees. 

According to the views of 1,808 analysts, XBI is a “Moderate Buy,” but the average XBI stock price target of $138.76 represents a scintillating upside potential of 66.8% from the ETF’s current price.

TipRanks utilizes proprietary technology to calibrate the analyst forecasts and price targets for ETFs based on a combination of the individual performances and price targets for the underlying assets. Using the Analyst Forecast tool, users can get an overview of the overall analyst rating, consensus analyst price target, the potential upside or downside for an ETF, and the highest and lowest analyst price targets. 

TipRanks calculates a weighted average based on the combination of all the ETFs’ holdings. The average price forecast for an ETF is calculated by multiplying each individual holding’s price target by its weighting within the ETF.

Of the 1,060 analysts in our dataset for XBI, 72.9% rate this ETF a Buy, and 23.8% rate it a Hold. Just 3.3% view XBI as a Sell. 

Furthermore, XBI has a “neutral” ETF Smart Score of 7 out of 10.

ETF Investing is a Great Approach for this Space

The biotech sector harbors a lot of potential, and clearly, the analyst community is bullish. Here’s why using an ETF like XBI could be the right way to approach investing in this space.

There are many biotech companies out there, and many of these are early-stage pre-profit or even pre-revenue companies whose fates are reliant on the development and commercialization of a single drug or therapy. Biotech companies typically invest heavily in research and development, but this investment does not always lead to commercially viable products.

Biotech companies, especially those with smaller market caps like many of the ones featured in this fund, tend to be more volatile than the average market. Some of these companies end up fizzling out after they run out of cash or end up falling dramatically if their treatments fail to gain approval.

On the other hand, while this is clearly a high-risk part of the market, the rewards can be tremendous as well. Early-stage biotechs that become successful can provide investors with enviable returns. Some of these companies are also acquired by larger pharmaceutical players for significant premiums as their treatments advance through the clinical process.

The differences can be hard to parse through for many investors, including myself. Investing in these types of companies requires a degree of specialist, industry-specific knowledge that not all investors have.

By investing in an ETF like XBI, investors can mitigate single-stock risk and give themselves tremendous diversification right off of the bat because this ETF holds 155 biotech stocks. XBI also adds to this diversification by investing across small-cap, mid-cap, and large-cap stocks. Not only does this limit the risk of investing in one company whose drug fails, but it also gives you plenty of shots on goal as a multitude of these companies could develop blockbuster drugs and treatments. 

XBI’s Holdings

XBI ETF’s holdings offer significant diversification. In addition to holding 155 positions, its top 10 holdings make up just 14.7% of assets. Top holding Madrigal Pharmaceuticals (NASDAQ:MDGL) makes up just a 3.5% position, and no other holding accounts for more than 1.6% of the fund.

Madrigal has climbed to this outsize weighting because the stock has surged to a phenomenal gain of 323% over the past quarter, highlighting the potential for significant capital appreciation that some of these stocks possess.

XBI rebalances on a quarterly basis, and its underlying index is modified equal weighted, so at the end of the quarter, XBI will take some profits in Madrigal, and it will again have a more equal weighting with the other holdings. As you can see, XBI spreads out its investments over many bets. Below, you’ll find a snapshot of XBI’s top 10 holdings.

Top holding Madrigal has a ‘Perfect 10’ Smart Score and has a Strong Buy consensus rating from analysts. Additionally, top 10 holdings like Seagen (NASDAQ:SGEN) and ACADIA Pharmaceuticals (NASDAQ:ACAD) also boast ‘Perfect 10’ Smart Scores.

Madrigal, the stock that has skyrocketed to a gain of 323% over the past quarter, is a clinical-stage biopharmaceutical company that develops treatments for cardiovascular, metabolic, and liver diseases. Madrigal has raced out to this incredible gain because it released positive late-stage results for its treatment for NASH.

One other positive attribute to note is that the fund’s average price-to-earnings multiple of 13.5 is lower than the S&P 500’s (SPX) average multiple of 21. Furthermore, the risk may be lower than it has been in the recent past. A well-cited figure from Janus Henderson Investors shows that in 2022, 16% of U.S.-listed biotech companies traded at valuations beneath their cash balances.  

Track Record

XBI has had a fairly quiet 2023 so far, with a 1.7% gain year-to-date. The ETF is down 7% over the past year, as rising interest rates and tighter economic conditions have dampened the appetite for high-risk, high-reward sectors like biotech. Over the past 10 years, the fund is up 148%, but it’s also down 9.8% over the past five years. However, zoom further out, and the fund is up over 400% since its inception in 2006.

In any case, the muted recent performance hasn’t tempered the bullishness of analysts, going forward.

Looking Ahead

Given the challenges of investing in individual biotech stocks, XBI is a great ETF for investors who want to gain exposure to this exciting space while avoiding single-stock risk. Analyst sentiment is bullish, with a consensus price target nearly 70% above today’s price. The recent performance of holdings like Madrigal Pharmaceuticals highlights the significant potential this ETF’s holdings have. XBI also has a reasonable expense ratio of 0.35%, further enhancing its appeal to investors.


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