Be Careful Before Loving Leveraged Biotech ETFs

Leveraged biotech ETFs are tempting, but think twice before jumping in

Talk about a rapid reversal. As measured by the Health Care SPDR ETF (XLV), the health care sector spent a significant portion of the year as the best-performing sector in the S&P 500. Now, XLV, the largest health care exchange-traded fund by assets, is saddled with a year-to-date loss of 1.5% after tumbling 9.3% over the past three months and 3.7% in the past two weeks.

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The primary culprit behind the health care sector’s recent retrenchment is biotechnology, an industry that is the second-largest weight in XLV at 24.4%.

This is how bad things have gotten, in short order, for health and biotech ETFs: Over the past month, the four worst-performing non-leveraged ETFs were health care, and three of those were, specifically, biotech ETFs.

And two of the most widely followed biotech ETFs — the iShares Nasdaq Biotechnology ETF (IBB) and the SPDR S&P Biotech ETF (XBI) — have tumbled 11% and 13.5%, respectively, over the past month.

Imagine how bad (or good) things have been for the new a crop of leveraged biotech ETFs. Until earlier this year, there were just two leveraged biotech ETFs on the market, the ProShares Ultra Nasdaq Biotechnology (BIB) and the ProShares UltraShort Nasdaq Biotech (BIS).

The easy way of explaining BIB and BIS is that those products attempt to deliver double the daily returns (or inverse returns in the case of BIS) of the Nasdaq Biotechnology Index. That is the same index tracked by the aforementioned iShares Nasdaq Biotechnology ETF. Over the past two weeks, BIS has surged 23% while BIB has shed 22%.

But wait, there’s more. The new crop of leveraged biotech ETFs are triple-leveraged, and the staggering returns (and losses) these funds have recently generated should serve as a reminder that not all investors should be involved with leveraged ETFs.

Just look at some of the following examples.

Direxion Daily S&P Biotech Bear 3X Shares (LABD)

The Direxion Daily S&P Biotech Bear 3X Shares (LABD) and its bullish cousin, the Direxion Daily S&P Biotech Bull 3X Shares (LABU), became the first triple-leveraged biotech ETFs available to investors when they debuted in late May.

These funds are linked to the S&P Biotechnology Select Industry Index, the same index followed by the SPDR S&P Biotech ETF — an equal-weight biotech ETF tilted more toward to small- and mid-cap biotech names. So in the case of LABD, traders are making bearish bets against names such as Juno Therapeutics (JUNO), Myriad Genetics (MYGN) and Infinity Pharmaceuticals (INFI).

Those bets are paying off in significant fashion as LABD has surged nearly 64% over the past three months on steadily increasing volume. LABU, the bullish leveraged fund, is down 63% over the same period, also on rising turnover.

LABD’s recent performance appears tempting, while contrarians could argue that opportunity is afoot with LABU following biotech’s recent plunge.

But think about this before jumping into either leveraged biotech ETF: Over the past three years, the standard deviation, a frequently used measure of volatility of the S&P Biotechnology Select Industry Index, is 30.3%, according to S&P data.

Said another way, that index of biotech stocks has been nearly three times as volatile as the S&P 500 over the same period. Now imagine applying triple leverage to something that volatile.

Both of these leveraged biotech ETFs cost 0.95% per year, or $95 per $10,000 invested.

ProShares UltraPro Short Nasdaq Biotechnology (ZBIO)

Not long after LABD and LABU debuted, the ProShares UltraPro Short Nasdaq Biotechnology (ZBIO) and the Proshares UltraPro Nasdaq Biotechnology (UBIO) launched. The ProShares ETFs are triple-leveraged plays on the Nasdaq Biotechnology Index.

That means a trader that is long ZBIO, the bearish member of the pair, is rooting for the likes of Biogen (BIIB), Gilead Sciences (GILD) and Amgen (AMGN) to decline. The Nasdaq Biotechnology Index is a cap-weighted index, meaning the five largest biotech stocks by market value, including the three aforementioned names, combine for over 41% of the index’s weight.

Like LABD, ZBIO has been a stud, surging 29% over the past month (54% over the past three months), while UBIO, the bullish fund, has tumbled 34% as over the past month as biotech stocks have faltered.

Apply the aforementioned lesson on volatility regarding LABD and LABU and apply it to UBIO and ZBIO. The iShares Nasdaq Biotechnology ETF, which tracks the Nasdaq Biotechnology Index, has a three-year standard deviation of just over 20%, according to iShares data. That is more than double the comparable metric on the S&P 500.

It would be wise to think twice before applying leverage to an index that is already inherently volatile.

The ProShares leveraged biotech ETFs also costs 0.95% a year, or $95 per $10,000 invested.

As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities. 

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/biotech-etf-stocks-etfs-labu-labd-zbio-ubio/.

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