Sell-Off in Biotech ETFs Could Be a Temporary Setback

October 10th at 7:30am by Tom Lydon

Biotechnology exchange traded funds are on a three-day sell-off after falling short of its 52-week high Friday, but the sector can still find its footing.

The he iShares Nasdaq Biotech (NasdaqGM: IBB) has declined 7.5% in the past three sessions, Market Vectors Biotech ETF (NYSEArca: BBH) fell 8.0% and dropped PowerShares Dynamic Biotechnology & Genome Portfolio (NYSEArca: PBE) 5.5%. [Wicked Wednesday for Some Beloved ETFs]

Bernstein Research’s Geoffrey Porges believes that the recently volatility does not “mark the end of the near two-year rally in the group,” reports Ben Levisohn for Barron’s. [Unearth This Hidden ETF if Biotech’s Decline is Real]

Porges argues that the sell-off affected stocks in relation to their volatility and expected duration of negative cash flow. Consequently, small-cap and mid-cap stocks were the most affected, along with companies with major uncertain events or significant revenue upside already factored into valuations.

“However, nothing changed in the environment to suggest that those events were any more or less likely to have positive outcomes yesterday, or to suggest that revenue potential was any more or less likely to be achieved than was previously expected,” Porges added.

Moreover, the sell-off was broad in nature, affecting other high beta and high growth areas, such as tech stocks.

Porges suggests that investors who still want to enter the space should target bio-tech large- and mid-caps with more stable earnings and product lines.

Looking at ETF market capitalization allocations, IBB follows a traditional market-cap weighted indexing methodology, with large positions in large-caps. BBH has a heavier emphasis on mid-cap holdings. PBE leans toward mid- and small-cap biotechs.

iShares Nasdaq Biotech

For more information on the biotech sector, visit our biotechnology category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.