Biotechnology stocks and exchange traded funds participated in the October broader market swoon, punishing funds such as the Direxion Daily S&P Biotech Bull Shares (NYSEArca: LABU) in the process.
LABU, which takes the 3x or 300% daily performance of the S&P Biotechnology Select Industry Index, is attempting to reverse its October slide this month and is off to a good start with a November gain of about 14%.
The slump in once hot biotechnology ETFs could present investors with a buying opportunity. 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.
Renewed Enthusiasm
Data points suggest that some traders used the October biotech slump as a buying opportunity in LABU. Over the past month, LABU, the dominant name among bullish leveraged biotech ETFs, is averaging daily inflows of $14.8 million, according to Direxion data. That is good for one of the best inflows among all Direxion leveraged bull funds.
One of the main drivers for the strong performance in the biotech and pharmaceutical industry is a lower corporate tax rate. As mentioned, these corporate tax breaks are helping to fuel the number of mergers and acquisitions taking place within the sector. Biotech’s sensitivity to politics could mean LABU is poised for increased activity following Tuesday’s midterm elections.
Mergers and acquisitions activity in the biotechnology arena is picking up in a big way to start 2018. Should that theme continue, short-term traders could potentially have ample opportunities to tap LABU.
LABU’s bearish counterpart is the Direxion Daily S&P Biotech Bear 3X Shares (NYSEArca: LABD). That ETF tries to deliver triple the daily inverse returns of the S&P Biotechnology Select Industry Index. That index is an equal-weight benchmark, meaning it leans toward mid- and small-cap biotech names.
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