Even With Volatility, Investors Love Biotech ETFs

By now, most investors have become well acquainted with volatility as it pertains to stocks to start 2016 and that word is certainly applicable to biotechnology stocks and exchange traded funds. Over the past month, three of the 13 worst-performing non-leveraged ETFs are biotech funds, a statistic that is made even more damning when considering januiary is usually a seasonally strong month for the biotech space.

Although biotech ETFs have sputtered to start the new year, investors are still displaying an affinity for the likes of the iShares Nasdaq Biotechnology ETF IBB and the SPDR S&P Biotech ETF XBI, the largest and third-largest biotech ETFs, respectively.

"Even on the carnage year to date, IBB has pulled in net inflows (>$140 million in), and we have seen similar inflows on weakness in competing ETF XBI (SPDR S&P Biotech, Expense Ratio 0.35%, $1.9 billion in AUM) which has attracted nearly $200 million year to date," said Street One Financial Vice President Paul Weisbruch in a recent note.

Not For The Risk Averse

XBI is not for the risk averse investor. 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.

As Weisbruch notes, risk-tolerant traders have also been embracing XBI's triple-leveraged equivalent, the Direxion Daily S&P Biotech Bull 3X Shares LABU. Entering Thursday, LABU was down 54.7 percent month-to-date, making it the second-worst performer among Direxion's leveraged bullish ETFs this month. Factor in Thursday's 6.7 percent loss, and LABU is now down more than 61 percent just this month.

Other data points confirm traders' interest in LABU. For example, for the five days ended January 21, LABU's volume was 119 percent above the trailing 20-day average and over the past month, the ETF's average daily creation has been over $1.7 million, according to Direxion data.