After struggling through one of its worst annual performances in several years in 2016, the SPDR S&P Biotech ETF (NYSEArca: XBI), the third-largest biotechnology exchange traded fund, is surging to start 2017.
XBI, which is an equal-weight ETF with significant exposure to smaller biotechnology names, is up nearly 17% year-to-date and that could be a sign that an important technical breakout is looming.
Healthcare stocks, especially the biotech segment, and related exchange traded funds rallied after Donald Trump’s stunning victory in the November U.S. presidential election, but enthusiasm for that trade quickly waned and Trump recently shown he is not shy about attacking drug companies on high pharmaceuticals prices.
Trump said he will force the pharmaceutical and biotechnology industries to bid for government businesses in order to help save consumers billions of dollars, Bloomberg reports.
There are other catalysts to consider, including that the U.S. economy moving into the late-cycle phase, overall growth may slow and signs of an economic slowdown could pop up. Consequently, investors may also turn to defensive sectors that are less economically sensitive, such as health care. Still, political risk looms.
XBI “tracks 90 U.S. biotech stocks using an equal-weighted methodology. This effectively gives smaller companies a more meaningful contribution to the overall return of the fund. Over the last year, this ETF has experienced a similar series of peaks and valleys. However, it has also developed a more definitive pattern or higher highs and higher lows,” according to See It Market.
The cap-weighted iShares Nasdaq Biotechnology ETF (NasdaqGM: IBB), the largest biotechnology ETF by assets, is also showing encouraging technical signs. That ETF is up 11% year-to-date.
Rare are the occasions that biotechnology stocks and exchange traded funds are seen as offering value. In fact, the sector historically trades at multiples that are elevated relative to broader benchmarks, but in a year of struggles for biotechnology names, some analysts see value with some big-name biotech stocks.
IBB, which holds nearly 190 stocks and is a cap-weighted ETF, has a price-to-earnings ratio of just over 21 and a price-to-book ratio of 4.92. The ETF’s three-year standard deviation is just over 25 percent. IBB is the largest biotech ETF by assets.
For more information on the biotech sector, visit our biotechnology category.