Traders Get Adventurous With Leveraged Biotech ETFs

After a third-quarter swoon that saw the iShares Nasdaq Biotechnology ETF IBB and the SPDR S&P Biotech ETF XBI, two of the largest biotech exchange traded funds by assets, tumble 18.1 percent and 24.4 percent, respectively, traders have displayed caution regarding biotech ETFs in the fourth quarter.

Biotech stocks and ETFs have been plagued by political grandstanding and the almost always present valuation concerns with both scenarios combining for significant headwinds for the sector. While some sell-side analysts and health care traders believe the recent biotech retrenchment has opened the door to a buying opportunity, there is still some debate regarding the efficacy of a legitimate biotech rally starting now and lasting into year-end.

That debate is highlighted by the fact that IBB and XBI, the largest and third-largest biotech ETFs, respectively, have lost over $283 million in combined assets during the current quarter. However, some might argue that investors and traders departing those ETFs now are being too hasty.

“Still, outside of the short-term headlines, biotechnology has been one of the best performing industries in the stock market over the past few years, for a number of reasons. Those who remain bullish think the industry’s drivers, including favorable demographics for demand and a robust pipeline, continue to point towards accelerated growth in the short -and long-term future,” said Direxion in a new research note. 

Direxion, the second-largest issuer of inverse and leveraged exchange traded funds, sponsors the Direxion Daily S&P Biotech Bear 3X Shares LABD and the Direxion Daily S&P Biotech Bull 3X Shares LABU. LABU is designed to deliver triple the daily performance of the same index tracked by XBI while LABD's objective is to deliver triple the daily inverse performance of that benchmark. 

LABD and LABU debuted on May 28, indicating that the former's launch was well-timed while the latter's was not. LABU losing 47.5 percent since coming to market has not prevented traders from putting nearly $192 million into the ETF, making it one of the most successful new ETFs to come to market this year.

In the fourth quarter, to varying degrees, traders have been cozying up to both LABD and LABU. Perhaps motivated by the epic plunge in shares of Valeant Pharmaceuticals International Inc. VRX, traders have poured nearly $14.1 million into LABD this quarter. Conversely, LABU has seen over $22 million in fourth-quarter inflows as some traders bet on a biotech rebound.

“More recently, accounting questions at Valeant Pharmaceuticals sent ripples through the entire sector. Valeant stock dropped over 45% last week after a report from Citron Research called the company 'the pharmaceutical Enron.' The report alleges that Valeant engaged in a series of sham transactions to inflate its drug sales,” said Direxion.