The coronavirus pandemic is fueling gains for biotechnology exchange traded funds this year and the leverage members of this group are participating in the fun.
Just this quarter, the Direxion Daily S&P Biotech Bull 3X Shares (NYSE:LABU) more than tripled. LABU attempts to deliver triple the daily returns of the S&P Biotechnology Select Industry Index, a benchmark that's a particularly potent avenue for biotechnology investors because its components are equally weighted, meaning smaller companies take on greater prominence.
“Despite its growth image, the biotechnology sub-industry proven resilient in periods during the recent market volatility, outperforming the broader health care sector year-to-date through June 12 as well as in the past 13 weeks as broader stock market recovered,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a recent note.
Why It's Important
Pivotal to biotech's fortunes, particularly the smaller companies residing in LABU's underlying index, is Food & Drug Administration (FDA) approval timelines – something that's been disrupted for the better due to the COVID-19 pandemic.
“CFRA Equity Analyst Kevin Huang thinks while the coronavirus pandemic has upset the research and development timelines of many biotech companies, the pandemic has also shifted the narrative away from high drug prices and towards the numerous potential cures and vaccines that are being developed for Covid-19,” notes Rosenbluth.
LABU jumped more than 27% last week, doing better than a 3-to-1 performance relative to the S&P Biotechnology Select Industry Index, which hit a record high last friday.
It remains to be seen if the winner of the coronavirus vaccine race resides on the roster of the S&P Biotechnology Select Industry Index, but it's clear there are some advantages to considering smaller biotech companies and, for risk-tolerant traders, adding leverage to that equation.
“While many biotechnology companies have grown over the years to be part of the S&P 500 Index, the sub-industry still includes many under-the-radar companies that might break out but might also suffer due to unforeseen circumstances and limited revenues,” notes Rosenbluth.
Each of the four largest non-leveraged biotechnology ETFs are up more than 30% over the past 90 days, but the SPDR S&P Biotech ETF (NYSE:XBI) – the fund LABU is the bullish leveraged answer to – is the leader of that quartet by a wide margin.
Todd Shriber owns shares of XBI.