Another Visit With A Leveraged Biotech ETF

For all the attention usually paid to biotechnology stocks and exchange-traded funds, arguably, it feels as though the November rally experienced by this volatile sector was often overlooked. Overlooked or not, that does not change the fact that during November, three of the top 10 non-leveraged ETFs in terms of percentage gain were biotech funds.

Non-Leveraged Biotech ETF Wins

That trio includes the SPDR S&P Biotech (ETF) XBI. XBI, the third-largest biotechnology ETF by assets, climbed 8.5 percent last month, a performance topped by just six other ETFs. XBI equally weights its 103 holdings, and the results have been stellar.

Over the past three years, XBI has surged 153.2 percent, topping the next closest biotech ETF by 300 basis points. As has been proven with other equal-weight ETFs, there are benefits to the methodology.

Related Link: Leerink Highlights Biotechs Poised To Benefit From ASH Conference

What is good for XBI is really good for the Direxion Daily S&P Biotech Bull 3X Shares LABU. The newly minted LABU attempts to deliver triple the daily returns of the S&P Biotechnology Select Industry Index, the same benchmark tracked by XBI.

LABU entered Monday as the best-performing bullish ETF in Direxion's leveraged stable. Even with its Monday decline of 3.7 percent, LABU is still finished November with a gain of more than 23 percent.

Bullishness And Biotechs

The recent bullishness enjoyed by XBI paints an encouraging technical picture for LABU.

“Daily returns have been positive during 68.42 percent of the trading sessions for the period,” according to a Direxion note referencing the previous 30 days. “RSI as a gauge of short term momentum is trending higher. Currently the RSI is at 60.89, well above the previous high of 58.11 on 11/4/15. The trend indicators MACD and DMI are collectively signaling a short-term uptrend. MACD is above the zero line and expanding, and the DMI spread is positive.”

XBI's advantages do not imply a free lunch. A hallmark of many equal-weight ETFs is a tilt toward smaller stocks not present in cap-weighted funds. XBI's holdings have a weighted average market capitalization of $9.8 billion. As a result, although XBI has been the best-performing biotech ETF over the past three years, it has also been the most volatile.

Be Aware Of Volatility

“Venture cash continues to boost the industry, as the rise in IPOs within the space over the 15 years has given investors more confidence in the growth prospects and research advancements of biotech. According to PricewaterhouseCoopers, over $2.3 billion of venture capital investments have flowed to the biotech space in the second quarter of this year. This is the highest amount of inflow to the space since 1995,” noted Direxion.

Traders have been warming to LABU's story. For the 30 days ended November 27, LABU averaged creation activity of nearly $437,000 per day, according to Direxion data.