After a volatile summer, the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB) has rebounded somewhat to gain 3.7% over the past month. Though modest by the standards of IBB and rival biotechnology exchange traded funds, the ETF’s recent bullishness could be a harbinger of more significant upside to come.
Greater scrutiny over drug prices and potential regulatory action would greatly hinder the industry’s ability to turn a profit, especially as repeated price increases have been a key driver of revenue for biotechs, even as demand has diminished. [Clinton Delivers Poison Pill To Biotech ETFs]
Many biotechnology companies have been shifting away from blockbuster drugs and developing more specialty drugs to treat specific diseases. The specialty drugs have also come with a higher price tag. Following political posturing on the issue of drug prices, biotech firms need to be cognizant of price, but that may not deter a near-term rebound for the sector.
If IBB “does move above the trendline we will know it was due to a definitive change in mood when perception of value suddenly changed,” reports Michael Kahn for Barron’s. “It would be a far more reliable breakout than one that takes place without a pause. Momentum-based pushes though trend lines are much more likely to fail than perception-based breakouts following pauses.”
Biotech fundamentals, broadly speaking are sound, but plenty of critics point to the industry’s richer-than-average multiples, which could make the likes of IBB vulnerable to more downside. 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. [Don’t Mess With the Leveraged Biotech Bull]
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.
iShares Nasdaq Biotechnology ETF
