After slumping last year, the SPDR S&P Biotech ETF (NYSEArca: XBI), the third-largest biotechnology exchange traded fund, is up 20% year-to-date, putting the equal-weight biotechnology fund in a new bull market. Some market observers see more upside coming for the popular biotechnology ETF.
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’s technical outlook is compelling as well.
“Because of the use of monthly moving averages, trading signals are relatively rare. Since the inception of XBI only five buy signals have been generated. Two of them were profitable and two of them were unprofitable. However, the profitable trading signals have greatly outperformed the two unprofitable signals,” according to Seeking Alpha.
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.
Year-to-date, investors have added nearly $190 million in new money to XBI while the two largest biotechnology ETFs have suffered outflows.
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.
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. That is the same index XBI tracks.
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.