Here's Why Biotech ETFs Are Rallying Hard

Core Insights - Biotech stocks have experienced a significant rally into 2026, driven by positive clinical data, attractive valuations, an easy money policy, and favorable macroeconomic conditions [1][9] - The iShares Biotechnology ETF (IBB) has outperformed the SPDR S&P 500 ETF Trust (SPY), with a 36.7% increase over six months ending January 7, 2026, compared to SPY's 11.2% [1] - Year-to-date performance shows IBB rising 4.2% while SPY has gained only 0.6% [1] Performance Metrics - IBB has surged 31.1% over the past year as of January 7, 2026, marking a significant turnaround from muted returns of 3.74% in 2024 and 0.97% in 2023 for the MSCI USA Pharmaceuticals, Biotechnology and Life Sciences Index [2] - The Biomedical and Genetics industry has returned 11.7% over the past three months, outperforming the S&P 500's 3.3% [3] Factors Driving the Rally - Biotech stocks are trading at decent valuations, with the MSCI USA Pharmaceuticals, Biotechnology and Life Sciences Index at a forward P/E of 24.36X compared to the broader MSCI USA index at 27.81X as of December 31, 2025 [5] - The PEG ratio for the Biomedical and Genetics industry stands at 1.54X, lower than the S&P 500's 2.06X, with projected EPS growth of 12.14% versus 9.15% for the S&P 500 [5] - The Federal Reserve's three rate cuts in 2025 have created a favorable environment for biotech companies, which typically benefit from lower funding costs [6] Clinical and Regulatory Developments - The FDA approved numerous biotechnology drugs in 2025, including dordaviprone and sunvozertinib, contributing to positive market sentiment [7][8] - A total of 46 drug approvals were recorded in 2025, following 50 in 2024 and about 55 in 2023, with ongoing positive drug trial results boosting stock momentum [8] M&A and Capital Market Activity - Deal volume in the biotech sector reached nearly 70 in 2025, the highest in a decade, driven by Big Pharma's patent cliff needs [11] - Follow-on offerings totaled $10 billion in Q4 2025, the strongest in nearly two years, indicating a revival in capital markets [11] - Biopharma venture investment reached $5.8 billion across 86 rounds in Q3 2025, bringing the year-to-date total to $17.1 billion [11][12] Biotech ETFs - Key biotech ETFs such as Tema Oncology ETF (CANC), S&P Biotech SPDR (XBI), Genomics Immunology and Health ETF (IDNA), and IBB are performing well, hovering around one-year highs [13]