Election History Says Buy Biotech Dip

Biotechnology exchange-traded funds were hot until they weren't. History indicates recent weakness in the previously high-flying group be a symptom of election year jitters and investors shouldn't ignore these funds for too long.

Take the case of the First Trust NYSE Arca Biotechnology Index Fund FBT.

What Happened: FBT, one of the largest funds in this category, flirted with $181 in mid-July. On Tuesday, it closed just under $151.

“However, since peaking on July 20th, the NYSE Arca Biotechnology Index has declined by 12.7%, while the S&P 500 Index has advanced by 8.7% (through 9/1/20),” said First Trust Senior Vice President Ryan Issakanien in a recent note.

“While there are many possible explanations for biotech’s recent underperformance, I believe one important factor is the upcoming presidential election. Rising health care costs in the U.S. have been a go-to wedge issue for Democratic party candidates in election campaigns, especially over the past two decades (Affordable Care Act passed in 2010). But if history repeats, this pullback may represent an attractive buying opportunity.”

Why It's Important: FBT and its peers were bid higher this year due in large part to the coronavirus pandemic. While that's a credible catalyst, investors need to prepare for life when COVID-19 is defeated.

That could include streamlined regulatory approvals and more consolidation, depending upon the outcome Election Day.

For those considering FBT today, it's worth noting that over the past four presidential election cycles, the only time the ETF's underlying index traded higher two months before Election Day was in 2004. Two months after those elections, FBT's benchmark was higher in three of those four years with 2008 being the exception.

What's Next: "During the last four presidential elections (2004, 2008, 2012 and 2016), biotechnology stocks performed poorly heading into election day. On average, the NYSE Arca Biotechnology Index had a -6.4% return during the prior 2 months,” according to First Trust. “However, biotech stocks also rebounded nicely following these elections, regardless of which candidate was elected. While Democratic and Republican presidential candidates split these four elections evenly, the average return 2 months after election day was 4.9%, and the average return 12 months after election day was 34.6%.”

As for what's next, investors are likely hoping history repeats because FBT's index traded higher by deep double-digit margins a year after each of the past four presidential elections.