How to Cope With Trouble in Biotech ETFs

A frequently cited statistic about biotechnology exchange traded funds is that six such funds are found among this year’s top 10 non-leveraged sector ETFs.

Impressive indeed, but biotech ETFs have recently shown vulnerability. For example, the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB), the largest biotech ETF by assets, fell nearly 4% last week on its way to shedding nearly $200 million in assets. While it remains to be seen if the recent struggles encountered by biotech ETFs are the start of something more severe or merely a bump in the road before a new leg higher, investors can prepare for the former scenario with inverse ETFs.

Thursday’s “action, looked to to us to finish off the right shoulder of a bearish Head & Shoulder Top pattern. For this to be completed, you need to see a break of the neckline, preferably on some heavy volume,” according to Captain John Charts in reference to IBB.

For traders with a taste and tolerance risk looking to bet on further downside for IBB, the newly minted ProShares UltraPro Short NASDAQ Biotechnology (NasdaqGM: ZBIO) is an idea to consider. ZBIO, which debuted in late June, attempts to deliver three times the daily inverse performance of the Nasdaq Biotech Index, IBB’s underlying benchmark. [Don’t Mess With the Leveraged Biotech Bull]

Gven the lofty year-to-year returns, some are growing cautious over the biotech sector. Some argue that the high valuations in the biotech sector have been supported by a low interest rate environment. However, with the Federal Reserve eying an interest rate hike, biotechs may be more vulnerable ahead.