March-end seems ill-fated for the biotech space. After witnessing a sharp sell-off last March, the biotech space has succumbed to a correction this March. Last year, this soaring corner of the broad U.S. healthcare market suffered the steepest decline in a single day since October 2011.

This year too, biotech stocks were able to keep their rally intact until March 25, breezing past the nearly flat broader market indices. However, on March 25, major biotechnology indexes were off over 4%, leading the Nasdaq Composite Index to see its biggest ‘one-day loss in nearly a year’ (read: 3 ETFs Surging at Start of 2015). 

The segment got hammered last week as worries over high flying stocks weighed on market sentiments. Also, these stocks witnessed intense selling pressure as investors remained concerned that strength in the U.S. dollar will negatively impact earnings growth in upcoming quarters (read: The Guide to Surging Biotech ETFs).

Short interest has been on rise for a few biotech players suggesting that many investors are wagering on more sell-offs in the space. However, we would like to note that gutsy investors can use this dip as an entry point to biotech.

Why Play the Pullback?

Despite the rough trading noticed lately, the space has encouraging industry fundamentals underneath. Increasing merger and acquisition activities, several important product approvals and label expansions, ever-increasing health care spending and an aging population would be the drivers of its potential outperformance.

Investors should note that the sector showed up as a star performer last year. The Nasdaq Biotechnology index delivered a stellar 34% return in 2014 – taking the wining position among all the sectors (read: 3 Biotech ETF Winners from 2014's Best Performing Sector).

A correction was long overdue in the space. Even after the sell-off,  the largest biotech ETF iShares Nasdaq Biotechnology (IBB - ETF report) trades at P/E (ttm) of 24 times which is way above the 19 times P/E (ttm) of SPDR S&P 500 ETF (SPY - ETF report). Even last year, the space suffered for a maximum of two months and after that bounced back.

There is yet another good news for the biotech stocks and related ETFs. The Fed signaled in its March meeting that it is in no hurry to hike rates and U.S. interest rates would rise slowly when the step is finally undertaken.

ETF Performances

The latest biotech ETFs performances are also indicative of our assumptions as the space rebounded in Friday’s trading after two days of sell-offs. Almost all ETFs added over 2% on March 27, 2015. ALPS Medical Breakthroughs ETF (SBIO - ETF report) added over 6%, BioShares Biotechnology Clinical Trials Fund (BBC) advanced 6.8%, Market Vectors Biotech ETF (BBH - ETF report) added about 2.8%, IBB was up about 3% and First Trust NYSE Arca Biotech ETF (FBT - ETF report) was up 3.8% over the last two days (as of March 30, 2015).

We would like to point to investors that FBT, SPDR S&P Biotech ETF (XBI - ETF report), IBB and Dynamic Biotech &Genome (PBE - ETF report) are top rated. Among these, FBT, XBI, IBB and PBE have a Zacks ETF Rank #2 (Buy) while BBH has a Zacks ETF Rank #1 (Strong Buy).

However, investors may specifically take interest in SBIO and BBC given the sudden spurt in the funds. This is especially true as the funds deal with unique concepts in the space (read: SBIO Vs. BBC: 2 Innovative Biotech ETFs Head-To-Head).

SBIO tracks the Poliwogg Medical Breakthroughs Index. The index screens the U.S. listed biotech or pharma companies with one or more drugs in Phase II or Phase III FDA clinical trials. Also, the companies need to have cash for two years at their normal burn rate. The fund mostly consists of mid and small caps.

BBC looks to track the LifeSci Biotechnology Clinical Trials Index to measure the performance of biotechnology companies with a primary product offering that is in a Phase 1, Phase 2 or Phase 3 clinical trial stage of development. BBC follows an equal weighted approach mainly from the small-cap space.