ETF Trends
ETF Trends

After stumbling in 2016, the iShares Nasdaq Biotechnology ETF (NasdaqGM: IBB), the largest biotechnology exchange traded fund by assets, is bouncing back nicely in 2017 and that is a theme some market observers believe is durable.

Other biotech ETFs are on the mend, too. 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 is an equal-weight ETF, featuring more exposure to smaller to 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.

Market observers are growing more bullish on the sector as a Republican-led Congress and administration could enact reforms to free cash held overseas for tax reason by large U.S. pharmaceutical companies, which could pave the way for increased acquisitions in the sector. The White House is also looking to help the Food and Drug Administration (FDA) expedite new drug approvals, which could serve as a major catalyst for the biotechnology space.

Healthcare stocks and ETFs rallied immediately following Republican Donald Trump’s surprising November victory. The impact of a Trump presidency on healthcare stocks remains to be seen. Candidate Trump rebuked Obamacare and if successful in that effort, there would likely be some effect on diversified healthcare ETFs due to their exposure to health insurance providers.

However, new drug approvals, or lack thereof in 2016, weighed on biotechnology ETFs last year. That could change in 2017.

“Examining a long-term chart of the popular IBB ETF, Evercore ISI technician Rich Ross points out that the biotech tracker suffered significant losses from mid-2016 to the end of the year, deeming the pullback “a very tough stretch” for the group. But since then, IBB has shown signs of a bullish rally ahead since it pulled back to its 200-day moving average,” reports CNBC.

ETF traders who are betting big on the biotechnology sector rebound have also utilized leveraged long options including the Direxion Daily S&P Biotech Bull Shares (NYSEArca: LABU), which takes the 3x or 300% daily performance of the S&P Biotechnology Select Industry Index.

Other options include the ProShares UltraPro Nasdaq Biotechnology (NasdaqGM: UBIO), which takes the 3x daily performance of the Nasdaq Biotechnology Index, and the ProShares Ultra Nasdaq Biotechnology (NasdaqGM: BIB), which takes the 2x performance of the same benchmark.

For more information on the biotech sector, visit our biotechnology category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.