Short Sellers Back Off From Biotech ETFs

The Covid-19 brought certain sectors serendipitous gains like technology, but even that space is now seeing sell-offs amid a September sell-off. As such, short sellers are coming in to reap the rewards, but one area that they’re backing off from is biotechnology.

“As market turbulence increased over the past few weeks, short selling of exchange-traded funds – that is, bets from investors who believe share prices will decline – has jumped, by $1.1 billion, according to a report out Wednesday,” a MarketWatch report noted. “But perhaps more interesting is which funds are being sold short the most. The report, from S3 Analytics’ Ihor Dusaniwsky, shows patterns over time, and hints at the themes investors are likely to win, and which will be out of favor.”

With a number of dynamic ETF products with the ability to short certain sectors, it only enhances traders’ toolboxes.

“As a reminder, ETFs are a popular way for short sellers to make their bets, because they offer exposure to an idea (an asset class, a geographical region, an industry, a theme) without the need to select individual stocks,” the report added. “Short interest in the SPDR S&P Biotech ETF XBI, +2.53% is down. ‘Shorts may be exiting their positions as COVID-19 vaccines and antivirals are getting closer to fruition,’ Dusaniwsky noted.”

Traders sensing more bullishness in biotech can use leveraged funds like Direxion Daily S&P Biotech Bull 3X ETF (NYSEArca: LABU). LABU seeks daily investment results that are equal to 300% of the daily performance of the S&P Biotechnology Select Industry Index with the majority of its allocations going towards securities of the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index. Furthermore, the index is designed to measure the performance of the biotechnology sub-industry based on the Global Industry Classification Standards.

XBI Chart

XBI data by YCharts

For investors looking for a non-leveraged option in biotech, there’s the iShares Nasdaq Biotechnology ETF (IBB). IBB seeks to track the investment results of the NASDAQ Biotechnology Index, which contains securities of companies listed on NASDAQ that are classified according to the Industry Classification Benchmark as either biotechnology or pharmaceuticals and that also meet other eligibility criteria determined by Nasdaq, Inc.

The fund generally invests at least 90% of its assets in securities of the index and in depositary receipts representing securities of the index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents.

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