In September Biotech stocks got hammered. Most market participants blamed the massive decline on Democratic Presidential candidate Hillary Clinton. On September 21, Clinton tweeted "Price gouging like this in the specialty drug market is outrageous. Tomorrow I'll lay out a plan to take it on." Clinton was referring to a drug called Daraprim, a 65-year-old drug, which recently saw its price increase from $13.50 per pill to $750.
While there are arguments for and against why Daraprim and other drugs increase in price, an industry-wide reform on how prices are set would likely hurt nearly every company in the biotech space. And that was what Clinton essentially proposed last month. With uncertainty surrounding the industry, the NASDAQ Biotechnology Index (NBI) fell by more than 15% just in September compared to a decline of just 4.4% for the S&P 500 during the month.
While the uncertainty pertaining to drug prices remains, investors have a few different ways to play the industry using ETF's that track biotech stocks.
3 Biotech ETF's Shorting the Industry
One of the big biotech ETF winners over the last month was Proshares UltraPro Short Nasdaq Biotechnology (ZBIO) ETF, which rose is up 52% and is up 64% over the last 3 months. Another healthy winner was the Proshares UltraShort NASDAQ Biotech (BIS) ETF which gained 34% over the last month and 43% over the last 3 months. But the real winner in the inverse Biotech ETF's is Direxion Daily S&P Biotech Bear 3X Shares (LABD) ETF. It is up 72% for the month and 99% over the last 3 months.
But, because these ETF's are taking short positions in the Biotech industry and the industry just recently nose-dived, over the past year BIS is actually down 42% and has lost 49% of its value over the last 5 years. (LABD and ZBIO don't have a year's worth of trading history due to their recent inception dates.) The thing to remember with the inverse ETF's is that when the world, or in this case the industry, is falling apart, they are wonderful. But, when the market is healthy and moving higher, you can lose big time.
3 Biotech ETF's Going Long on the Industry
The opposite trade from shorting the biotech industry is going long, which over the last few months has been a big loser. For example the iShares Nasdaq Biotechnology (IBB) ETF is down 15% for the month and off 21% over the last 3 months, but is still ahead for the year by more than 16% and is up 27% over the last five years. The SPDR S&P Biotech (XBI) ETF is down 21% for the month, 29% over the last 3 months, but is still up for the year with a 26% year-to-date gain, even with the recent decline.
But when it comes to the bullish biotech ETF's, none are doing worse in the short term than the Direxion Daily S&P Biotech Bull 3X Shares (LABU) ETF which has lost 54% of its value over the last 30 days and 70% of its value over the last 3 months. The LABU though is a 3 times leveraged ETF, meaning the ETF seeks daily investment results of 300% of the performance of its tracked index, which in this case is the S&P Biotechnology Select Industry Index.
Final Thoughts
Each of the six ETF's mentioned above, in one way or another, track the Biotech industry as a whole. There are other biotech ETF's that track more specific niches within the biotech industry, but if you are looking to get much more specific than just biotech's in general, you are likely better off just investing in a few individual biotech stocks, as opposed to a general ETF.
As for whether you should go long or short on Biotech's?
Investors have an opportunity to make a massive amount of money since it appears the debate over regulating drug prices has just begun; but they have to pick the correct direction the Biotech industry will head in the long term.
Personally, I believe the industry as a whole will be held down by the uncertainty for an extended period of time, thus making shorts profitable.
But, as anyone who has invested in biotech stock before knows, these stocks can skyrocket in a matter of a few hours, which would destroy anyone who had shorted them. And loses would get even worse if you had used a leveraged ETF, as opposed to a standard biotech ETF.
At the end of the day, I will leave this trade up to those whom have a higher risk tolerance than I, and quite honestly I believe there are much easier ways to make money than betting on biotech stocks.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor had no position in any equity mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
