Not that they need the help, but count biotechnology exchange traded funds among the industry ETFs that will not be running and hiding if the Federal Reserve raises interest rates later this year.
“Biotech performance is inversely related to interest rates. Interestingly, we note that this correlation is stronger for Biotechs vs. S&P500: Given the news around the possibility of interest rate increase, investors are asking about the potential correlation between interest rates and Biotechs,” according to a Deutsche Bank note posted by Ben Levisohn of Barron’s.
The recent surge in 10-year Treasury has done nothing to derail biotech ETFs. Since Feb. 2, 10-year yields have surged 25.4% and the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB), the largest biotech ETF, is higher by almost 11% over that period. [More Upside for Healthcare ETFs]
The SPDR S&P Biotech ETF (NYSEArca: XBI) and the First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT) are up 18% and 13.4%, respectively, over that period.
Deutsche Bank studied 20 years of data on the Nasdaq Biotechnology Index, IBB’s underlying index, and the NYSE Arca Biotechnology Index, FBT’s underlying index, against 20-year bond rates and “found the correlation at negative 0.78 for the NYSE ARCA Biotech Index while it was negative 0.69 for the NASDAQ Biotechnology Index,” according to Barron’s.
What’s interesting about biotech ETFs as stars during rising rate environments is that durability is not guaranteed to trickle down to all of the healthcare sector. During the Fed’s last tightening cycle, which ran from 2004 through 2006, the Health Care Select Sector SPDR (NYSEArca: XLV) lagged the S&P 500. [Sector ETFs for Rising Rates]
So did IBB. The ETF rose just 6.6% from the start of 2004 through the end of 2006 while the S&P 500 surged 34.5% over the same time frame. However, this is a different era for the health care sector, including the biotech industry.
On Monday, 26 healthcare ETFs touched all-time highs, nine of which were biotech funds.
iShares Nasdaq Biotechnology ETF
