Believing in the Biotech ETF Bounce

The iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB), the largest biotech exchange traded fund by assets, extended a bear market in the first quarter. Some rival biotech ETFs fared significantly worse, but the group has started to rebound and that has some technicians calling for more upside from the once hot biotech ETF space.

The time to buy, regardless of sector, is usually when a particular group falls out of favor, not when it has been bid higher by scores of investors. Some investors view that as the case with the broader healthcare group and biotechnology in particular.

Biotechnology ETFs should also prove immune to hawkish changes in Fed policy. A recent study by Deutsche Bank indicates major biotech indexes have negative correlations to changes in 20-year U.S. government bonds. Looking ahead, in the years through 2024, spending growth is projected to average 5.8% and peak at 6.3% in 2020.

Multiple factors, including politics, have hampered IBB and its peers. Election year posturing over drug prices represents a significant headwind for the healthcare sector and that is something biotech ETFs like IBB have already proven vulnerable to. Just go back to September 2015 and refer to Hillary Clinton’s Twitter feed.

Investors who are closely watching the presidential race will want to keep an eye on Clinton in the coming months. If Clinton makes her way to the Oval Office and implements more regulation on pharmaceutical drug pricing, biotech companies may underperform the broader market.

IBB “completed a short-term double bottom last week with a huge surge through the top of that pattern. A double bottom is named for its twin lows at about the same price. On the charts, it resembles the letter “W” and the breakout becomes official when price moves above the center peak. Volume confirmed the move by surging on the day of the breakout to suggest a sea-change of sentiment and demand. Momentum indicators and moving averages also pointed to improving conditions,” reports Michael Kahn for Barron’s.