Traders Bet Against Hillary With Leveraged Biotech ETF

This week has been tumultuous one for biotechnology stocks and exchange traded funds thanks in large part to a Monday by presidential candidate Hillary Clinton excoriating the pharmaceuticals industry for price gouging.

That was bad news for biotech stocks and ETFs as well. For two consecutive days, biotech funds have been among the worst-performing ETFs on a percentage basis. And for two consecutive days, the Direxion Daily S&P Biotech Bear 3X Shares LABD has been the top-performing ETF on a percentage basis. After surging more than 16 percent on Monday, LABD climbed 6.4 percent Tuesday on volume that was roughly two and a half times the daily average.

Some traders are betting Clinton's impact on biotech stocks has an imminent expiration because data indicate traders are piling into LABD's bullish equivalent, the Direxion Daily S&P Biotech Bull 3X Shares LABU. For those keeping score at home, only three ETFs suffered worse percentage losses than LABU did on Tuesday.

According to Direxion data, there were seven creations in LABU on Monday and nine more on Tuesday. Each creation is equivalent to 50,000 shares, so 450,000 new shares of LABU have been created this week. Based on Tuesday's closing price of $28.30, that means LABU has added over $12.7 million in new assets just this week even though the ETF has plummeted nearly 21 percent.

This is not an unusual phenomenon with pairs of leveraged ETFs. In fact, the history of leveraged ETFs is littered with examples of the worst-performing member of a pair frequently seeing inflows well in excess of the better-performing member. The Direxion Daily Gold Miners 3X Bear Shares DUST and the Direxion Daily Gold Miners Bull 3X Shares NUGT have taught this lesson with alarming frequency in recent years. 

Add to that, many market participants are wired with a bullish bias, so it probably is not surprising that they prefer LABU over LABD. As of September 21, LABU had hauled in $123.6 million in assets since coming to market, making it one of the more successful ETFs to debut in 2015. That is about 10 times the amount of capital that flowed into LABD prior to the start of this week. On Tuesday, volume in LABU was more than triple the daily average.

LABU attempts to deliver triple the daily returns of the S&P Biotechnology Select Industry Index, the same benchmark tracked by the SPDR S&P Biotech ETF XBI. Interestingly, money has been pouring into LABU even has XBI has lost assets this month.