The biotechnology sector should be a major beneficiary of an ageing world population and strained government health budgets as companies develop new drugs to treat chronic diseases.

After underperforming the major indices since the end of the pandemic, the NBI (Nasdaq Biotechnology Index) offers great relative value and the prospect of superior earnings growth.

The sector trades at a 18% PE (price to earnings) ratio discount to the S&P 500, and at a 26% discount to its historical 10-year average PE, according Yardeni Research.

The current rating and negative sentiment look anomalous against the backdrop of superior earnings growth which has averaged 15% a year over the last decade.

It is no surprise to investment managers at International Biotechnology Trust (IBT) Ailsa Craig and Marek Poszepczynski who have argued the sector is characterised by big up and down cycles.

Given the cutting-edge science which companies in the sector are developing it is understandable to see periods of over-exuberance followed by big downturns and an exit of capital.

In turn, rock-bottom valuations attract mergers and acquisitions which starts the cycle all over again, leading to the next up-cycle.

The current down cycle has been exacerbated by the speculative interest in the sector during the pandemic.

Even large successful firms such as leading vaccine maker Moderna (MRNA:NASDAQ) which discovered the first Covid-19 vaccine based on mRNA technology have had a rough two years.

After leaping over 10-fold during the pandemic the shares have lost 78% of their value since August 2021.

Craig and Poszepczynski believe the sector remains unloved but sense winds of change as the trust has started to benefit from predatory interest in the sector with six companies being ‘picked-off’ over the last few months and Eli Lilly (LLY:NYSE) has just announced the $1.4 billion takeover of cancer biotech Point Biopharma (PNT:NASDAQ).

While buying individual biotech companies is not for the faint hearted and best left to the professionals, getting exposure through an tracker provides a less bumpy (although bumpier than the S&P 500) ride.

As well as getting sector diversification, investors gaining exposure to the index also benefit from broader equity diversification, because biotech tends to move independently from other equity sectors and indices.

A cost-effective way to track the NBI is through the iShares Nasdaq US Biotechnology ETF (BTEK) which has an ongoing charge of 0.35% a year.

Top holdings include Moderna, human therapeutics giant Amgen (AMGN:NASDAQ), software and analytics firm Vertex VERX:NASDAQ) and Gilead Sciences (GILD:NASDAQ).

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