Key Takeaways
- Significant spending on AI and biotechnology has investors particularly excited about potential breakthroughs in biotechnology despite its speculative nature.
- The biotechnology sector has faced challenges such as high interest rates, a quiet IPO market and reduced merger and acquisition activity, creating headwinds for growth.
- In July 2024, smaller market-capitalization companies, including those in biotechnology, outperformed larger companies due to a cooler inflation report and expectations of Federal Reserve rate cuts, highlighting potential future returns.
As the earnings reports across major technology companies have come out in July and August 2024—so far—the primary question seems to be: We are seeing all of this money spent on AI, but what is going to generate a reasonable return on that investment?
Technologies are really just tools, not ends in themselves. Their value comes from how we use them. When we speak to investors, the topic that seemingly gets them the most excited is the possible breakthroughs in biotechnology.
However, excitement doesn’t always translate into share price returns, and biotechnology returns, in general, have been challenged in recent years. These companies are very speculative. We often write of newer technology companies that may not yet have positive earnings, but in the biotechnology space, it is not difficult to find companies that don’t even have revenues. It is very difficult to repeatedly look at companies that don’t even have revenues and try to determine if they will (or won’t) find success.
Challenges have also abounded:
- We saw the Fed Funds policy rate go from roughly zero, where it had been for an extended period, to a level above 5%. This transition, which occurred during 2022 and 2023, was a big headwind for more speculative growth companies like those in biotechnology. As we write these words, market volatility has ticked upward, and Professor Siegel, WisdomTree’s Senior Economist, has made a call on the U.S. Federal Reserve to start lowering its policy rate more quickly.1
- The market for initial public offerings (IPOs) has been quieter. When prospects for returns are higher, companies in the private markets see this and tend to consider becoming public.
- Merger and acquisition activity has been quieter. If a biotechnology company can prove a concept or get an initially promising trial result, it’s not unusual to see a bigger company seek to make an acquisition.
These challenges, and others, are important to be aware of even if we recognize that the environment can shift at any time, with former headwinds quickly becoming tailwinds.
The July 2024 Case Study
For the better part of the period from November 2022 leading into July 2024, equity market performance was defined by the largest companies—we even started to call them the “Magnificent 7”2—leading the market. More speculative companies—like those in biotechnology—were not associated with equity performance leadership in any sort of major trend during this period.
During July 2024, catalyzed by a cooler inflation report that could lead to a greater expectation of actual U.S. Federal Reserve policy rate cuts, we suddenly saw smaller market-capitalization companies outperform the largest market-capitalization companies.3
Biotechnology companies, even those within the WisdomTree BioRevolution Fund (WDNA), participated in this rally. In figure 1b, we even see that amongst WisdomTree’s six different thematic Funds, WDNA was actually the top performer during the month of July 2024.
Figure 1a: Standardized Returns
Source: WisdomTree, specifically data is from the PATH Fund Comparison Tool, as of 6/30/24. NAV denotes total return performance at net asset
value. MP denotes market price performance. Past performance is not indicative of future results. Investment return and principal value of
an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current
performance may be lower or higher than the performance data quoted. For the most recent month-end and standardized performance
and to download the respective Fund prospectuses, click the relevant ticker: WDNA, WCBR, WCLD, WTAI, WBAT and WTRE.
Figure 1b: WisdomTree’s Thematic Equity Funds during July 2024
Source: WisdomTree, specifically data is from the PATH Fund Comparison Tool, accessed as of 8/4/24. NAV denotes total return performance at
net asset value. MP denotes market price performance. Past performance is not indicative of future results. Investment return and
principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their
original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end and
standardized performance and to download the respective Fund prospectuses, click the relevant ticker: WDNA, WCBR, WCLD, WTAI,
WBAT and WTRE.
If we dig into the WDNA portfolio, we see the top 10 performing companies—with some pretty big returns in a short time—emphasizing that “small cap” status. Even if there are, of course, broadly diversified small-cap equity funds, WDNA is also tapping into this rally somewhat.
We’d recognize that these companies are high on the risk spectrum. Yes, July 2024 looked strong, but in a tougher market condition, it would be difficult to argue that these companies would exhibit share price performance that mitigated downside risk.
Figure 2: Top 10 Performers in WDNA during July 2024
Source: Bloomberg. Data pulls in the top 10, ranked by performance, for the month of July 2024 from within WDNA. “Average
Weight” refers to the weight during July 2024 within WDNA, averaged for the period. “GICS” refers to the “Global Industry
Classification Standard,” which is shown at the “industry” level. “Small cap” refers to companies below $2 billion in market
capitalization. “Mid cap” refers to companies between $2 billion and $10 billion in market capitalization. Past performance is
not indicative of future results. Holdings subject to change.
We can also confirm in figure 3 that WDNA, relative to WisdomTree’s other thematic equity Funds, has the second-highest proportion of small-cap companies.
Figure 3: Proportion of Large-Cap, Mid-Cap and Small-Cap Companies in WisdomTree’s Thematic Equity Funds
Source: the WisdomTree Fund Compare Tool within the PATH suite of tools, as of 6/30/24. Holdings subject to change.
Conclusion: Why Are We Excited about the BioRevolution?
At WisdomTree, we work with Dr. Jamie Metzl, who recently published the book Superconvergence, detailing how different megatrends, like artificial intelligence, are converging with advances in biotechnology and leading to a massive amount of potential innovation. We’ve written a series of blog articles about different concepts discussed in this book.
Take mRNA as an example. We saw what happened with the COVID-19 vaccines generated in record time with technologies that had been under study for decades. Companies like Moderna rallied massively as they served the market’s insatiable appetite for vaccines. We love to discuss mRNA not only for what it did in the past with COVID-19 but for what it represents in the future—a platform upon which other therapies may be built. We are on the cusp of using this technology on a far broader basis—and it is not the only one.
The excitement, we find, is resilient, and we believe that with further announcements and developments, the biotechnology space may very well generate a period of stronger returns—especially if the macro backdrop becomes a bit easier with lower interest rates.
1 Source: Professor Jeremy J. Siegel, “It’s Time for the Fed to Cut”, WisdomTree, 8/5/24, https://resources.wisdomtree.com/weekly-siegel-commentary/archive-august-5-2024
2 Refers to Amazon, Apple, Alphabet, Microsoft, Tesla, Nvidia and Meta Platforms.
3 Source: Christopher Gannatti, “Will July 2024 Be a Harbinger of Small-Cap Strength in U.S. Equities?”, WisdomTree, 8/6/24, https://www.wisdomtree.com/investments/blog/2024/08/06/will-july-2024-be-a-harbinger-of-small-cap-strength-in-us-equities