This Biotech ETF Is Setting A Blistering Pace

Knowing that biotechnology stocks and exchange-traded funds are struggling to start, that headline gives away the fact the ETF that is on a blistering pace is an inverse fund.

With the biotech sector's well-known penchant for volatility on the way down, an ETF such as the Direxion Daily S&P Biotech Bear 3X Shares LABD can prove particularly rewarding in the current environment. LABD is up about 27 percent month-to-date, making it the third-best performer in Direxion's stable of bearish leveraged ETFs.

Related Link: Rebound For Big Biotech ETF Will Require Some Patience

But wait. There's more. Year-to-date, LABD has nearly tripled. By comparison, the SPDR S&P Biotech (ETF) XBI, the ETF LABD tries to deliver triple the daily inverse returns of, is down just 34.4 percent this year.

That means LABD is overshooting its stated objective in significant fashion. According to Direxion data, LABD's 30-day variance against its underlying index is about 7.2 percent, a percentage exceeded by three of the issuers other bearish leveraged ETFs.

If that level of volatility is not your cup of tea, there is the Direxion Daily S&P Biotech Bear 1X Shares LABS, LABD's inverse-though-not-leveraged cousin, which debuted in December.

There are several reasons leveraged ETFs are always as advertised as short-term trading vehicles, and one of the prime reasons is daily rebalancing. Leveraged ETFs invest in derivatives to attain leverage and those derivatives require daily rebalancing to bring the ETF in line with the index it is attempting to track.

Daily rebalancing of leveraged ETFs has also been highlighted as contributing factor in end-of-day market volatility. However, data suggest that even with a recent uptick in end-of-day leveraged ETF rebalancing, daily rebalancing of these funds is well off the levels seen in 2011.

Despite its recent ascent, volume in LABD has been benign. For the five days ended February 9, LABD's average volume was 11.1 percent below its trailing 20-day average, according to Direxion data. However, traders are not missing out on LABD's upside. For the 30-day period ended February 9, LABD averaged daily inflows of over $291,400, according to issuer data.