Biotech ETFs seesawed in recent weeks, sliding after grim Fed
comments, perking up after blockbuster earnings from big-cap
) andBiogen (
), and slumping again upon more modest news fromCelgene (
) andAlexion (
The gyrations underscored the need for investor caution about
this volatile health subsector, experts told IBD.
"We could see large distortions based on earnings season,"
said Spencer Bogart, an analyst with ETF.com. "There were a few
complete breakaway earnings that shocked markets and drove up
On July 23, Gilead and Biogen announced earnings that handily
beat Street estimates. Later that day, positive news rolled in
about an experimental cancer drug. Its manufacturer, the
loss-makingPuma Biotechnology (
), zoomed 295% on massive volume.
Biotech ETFs popped on these reports.
SPDR S&P Biotech (XBI) gapped up 7% to close at 150.27.
Ninety percent of the equal-weighted fund's holdings are micro-,
small- and midcap stocks, including PBYI.
"Some of the gains in individual biotech stocks were so great
that even as a small position in a diversified portfolio, they
had an outsized influence in driving those portfolios up," Bogart
XBI's performance on July 23 marked a sharp recovery from the
prior week. It had tumbled on July 15 after Federal Reserve
Chairwoman Janet Yellen described small-cap and biotech stocks as
Also falling were sector leader iSharesNasdaq Biotechnology
(IBB) and the year's best performer among nonleveraged funds in
the space,First Trust AMEX Biotechnology (FBT).
Two days later, on July 17, all three ETFs fell below their
50-day moving average lines
. Upbeat news from Gilead and Biogen on July 23 pumped them up
But the boost proved short-lived, with the funds swooning amid
Celgene and Alexion's muted earnings news the next day.
IBB is up 1.5% in the past week while gaining 12.06% year to
date. FBT gained 0.9% and 17.82% in the same periods. By
comparison, the SPDR S&P 500 (SPY) returned 0.01% and 8.04%
over these time frames.
Biotech ETFs have been consolidating since the spring and have
formed cup-with-handle bases.
Many analysts share Yellen's views on biotech stocks.
The subsector carries ripe valuations vs. the broader health
care sector and
U.S. stock market
. IBB trades at 26.9 times forward earnings and 6.6 times book
value, while yielding 0.27%, according to Morningstar.
In contrast,Health Care Select Sector SPDR (XLV) trades at
20.4 times prospective earnings and 3.4 times book value,
yielding 1.6%. SPY carries a P-E ratio of 17.4, P-B of 2.4 and a
dividend yield of 2.3%.
Strategists caution that a few recent successes such as PBYI
have sparked a speculative hunt for the next hot drug.
"The biotech industry has valuations which far exceed what
profits these companies are likely to generate in the future,"
said Andrew Rosenberger, senior investment manager at
Pennsylvania-based Brinker Capital, which manages $17 billion in
The drug pipelines of smaller, more speculative biotech firms
are unpredictable, he added.