Up more than 42% year-to-date, the SPDR S&P Biotech ETF (NYSEArca: XBI), one of the largest biotechnology ETFs, is one of this year’s best-performing non-leveraged ETFs. That does not mean XBI’s run is over. Some market observers argue the opposite is true.
Biotech ETFs soared even after it became apparent Senate Republicans’ efforts to replace the Affordable Care Act, also known as Obamacare, are stalling. Healthcare stocks are also showing attractive valuations relative to other defensive sectors, which are richly valued. In recent weeks, mergers and acquisitions and Food and Drug Administration (FDA) approvals have been boosting biotechnology stocks and ETFs.
XBI “has risen 10 percent in the past two weeks alone, spurred by Gilead’s deal to acquire Kite Pharma, which sent both companies’ shares higher. Not only are they both components of the fund, but the takeout led to increased optimism about large and small pharmaceutical companies alike,” reports CNBC.
Historically, biotechnology stocks perform well in September, bolstering the near-term case for XBI. Biotechnology historically trades at multiples that are elevated relative to broader benchmarks, but after last year’s of struggles for biotechnology names, some analysts see value with some big-name biotech stocks.
“Wedbush analyst David Nierengarten increased his rating on Juno Therapeutics to outperform from neutral last week and nearly doubled his price target, explaining that the Kite deal ‘further validates the CAR-T business model, and makes us review our JUNO valuation … [W]e now model for a faster adoption rate … as GILD’s entry into space should lead to greater awareness and infrastructure buildup,’” according to CNBC.
Related: Biotech ETFs Remain Bell of the Ball
XBI is an equal-weight ETF, so it is not dominated by one or two large-cap stocks, but its two largest holdings are Kite Pharma and June Therapeutics.
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.