The SPDR S&P Biotech ETF (NYSEArca: XBI), one of the largest biotech ETFs, is getting in on the sector’s resurgence.
XBI, an equal-weight fund, is up more than 40% year-to-date and multiple catalysts are stoking the biotech rally.
“The industry’s sales and earnings growth had been slowing since 2015, putting pressure on share prices,” said State Street in a recent note. “But Wall Street is taking a new shine to the industry, and analyst earnings and sales revisions are becoming more upbeat. In the third quarter of 2017, the ratio of analyst upgrades to downgrades touched its highest level since the first quarter of 2016.”
Healthcare stocks are also showing attractive valuations relative to other defensive sectors, which are richly valued. 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.
Biotech “trades more than 25% below its 15-year average based on historical and forward price-to-earnings ratios. Compared with the broader market, biotech stocks are also trading at a discount and far below their historical average,” according to State Street.
Related: Biotech, Pharma ETFs Leave Pricing Drama Behind
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.
“Another factor supporting biotech’s resurgence: A strong product pipeline. So far this year, the US Food and Drug Administration (FDA) has approved more novel drugs—drugs that frequently provide important new therapies for patients—than any year-to-date numbers since 2011,” notes State Street.
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.