“Some of the things that have boosted the biotech sector are likely to disappoint in the next few years,” Brad Sorensen, director of sector research at Charles Schwab, said in the FT article. “We are warning investors that the biotech sector does have toppy tendencies. It does seem overvalued at this point.”
Additionally, Emmanuel Cau, global equity strategist at JPMorgan, warned that merger and acquisition activity, which has also added to biotech momentum, is sensitive to Fed tightening. Sorensen also cautioned that new drugs don’t always get approved and M&A won’t last forever.
Despite concerns that biotech stocks remain excessively valued and vulnerable to sharp pullbacks, traders are embracing leveraged biotech ETFs at a decent clip. For instance, in the three weeks ending July 13, traders added nearly $27 million to ProShares Ultra Nasdaq Biotechnology (NasdaqGM: BIB), which attempts to deliver twice the daily returns of the NASDAQ Biotechnology Index. [Traders Bet on new Leveraged Biotech ETFs]
On the other hand, investors who are wary of a potential biotech pullback can utilize a few inverse or bearish ETF options to hedge their positions. For instance, the recently launched Direxion Daily S&P Biotech Bear Shares (NYSEArca: LABD) takes the -3x or -300% daily performance of the biotech sector, ProShares UltraPro Short NASDAQ Biotechnology (NasdaqGM: ZBIO) tracks the -3x or -300% daily performance of the Nasdaq Biotechnology Index, ProShares Ultrashort Nasdaq Biotechnology (NasdaqGM: BIS) tracks the -2x or -200% daily performance of the biotech space and ProShares UltraShort Health Care (NYSEArca: RXD) follows the -2x or -200% daily performance of the broader healthcare sector.
For more information on the biotech sector, visit our biotechnology category.
Max Chen contributed to this article.