The Federal Reserve started to raise interest rates in December 2016, for only the second time in a decade, and it is expected to raise the federal funds rate by a quarter point — one quarter of one percent — two more times in 2017, followed by three increases in 2018. If these raises occur, the federal funds rate will rise to a range of 2% to 2.25% by the end of 2018. And that cycle, is expected to continue to persist at a steady pace for the next couple of years.
With higher interest rates, investors may find small-cap biotechnology exchange traded funds that track companies banking on a breakthrough drug less appealing. This could pose problems for smaller companies with unprofitable operations, making investing in them seem riskier.
Spectrum Pharmaceuticals (NASDAQ: SPPI), Acorda Therapeutics (NASDAQ: ACOR) and Nektar Therapeutics (NASDAQ: NKTR), for instance, are among those who are now suffering — share prices going down spiral — from the rate hikes as stocks and related ETFs seem less attractive in this environment. Despite negative effects on small-cap companies, it might be too early to judge how these companies will stack up to the interest rates and industry benchmarks.