The summer months can be unkind to the broader market, but some sector and industry funds perform well as temperatures heat up. The SPDR S&P Biotech ETF (NYSEArca: XBI), one of the largest biotechnology exchange traded funds (ETFs), has a rich history of delivering summer upside.
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.
XBI “boasts the biggest average summertime return over the last decade, up 7.46% with 80% positive returns,” reports Schaeffer’s Investment Research. “The biotech tracker is down about 11% on a year-over-year basis, but as recently as early April, XBI’s 30% year-to-date advance roughly doubled that of the broader SPDR S&P 500 ETF Trust (SPY). Since then, XBI has pulled back quite a bit, and is now matching SPY with an approximately 13% gain for 2019.”
Examining XBI ETF
Adding to the case for biotech investments is that, broadly speaking, valuations in the group currently are not excessive. That is something to consider when noting biotechnology stocks often trade at premiums to the healthcare sector and broader market.
Healthcare ETFs, including biotech funds, could benefit from politicians’ plans to lower drug prices, something the White House took aim at last year. The administration has focused primarily on middlemen like pharmacy-benefit managers instead of manufacturers. The new policies have a more subtle affect on the overall industry as it may affect sales of certain blockbuster drugs but damage the share prices of smaller companies.
“But what’s troubling about XBI’s chart is the fact that it’s trading below its bearishly crossed 50-day and 200-day moving averages, with the latter trendline acting as resistance since mid-April,” according to Schaeffer’s. “Short interest on the fund is at its highest level since October 2015, which could potentially contribute to a high-velocity rally — but until those formidable moving average hurdles are taken out, it’s hard to consider XBI as a bullish summer play.”
For more information on the healthcare industry, visit our healthcare category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
