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Guide to Inverse & Leveraged Biotech ETF Investing

Biotech investing has been on a see-saw ride of pains and gains this year. This piping hot corner of the broad U.S. health care market can easily be termed as one of the super performers in the last five years and can be an intriguing bet for investors with a long-term view.

The biggest biotech ETF iShares Nasdaq Biotechnology ( IBB ) gained over 285% during this frame.

Last year too, this high-growth sector delivered a stellar 34% return and outdid all the other sectors. The Fed's super-easy monetary policy, a whirlwind of mergers and acquisitions, promising industry fundamentals, plenty of drug launches, FDA approvals for the highlyawaited drugs, ever-increasing demand in emerging markets, surging health care spending and Obama care wrote the success story at biotech (read: Obamacare is Here to Stay: 3 ETFs to Buy ).

However, the space has long been guilty of overvaluation; with even the Fed chair Yellen pointing to it last year. As a result, the space succumbs to a correction just as the broader market hits any growth-related bump and a risk-off trade sentiment takes over. This well explains why the biotech space has been floundering in the recent global market rout instigated by a Chinese market crash.

If this was not enough, Hillary Clinton, who is a presidential candidate, recently raised concerns about the over pricing on life-saving drugs on Twitter. This tweet came on the heels of a 5,455% price hike (in about two months) of a drug called Daraprim, used to treat malaria and toxoplasmosis. This apparently eccentric pricing action was taken by a privately held biotech company Turing Pharmaceuticals (read: How Hillary Clinton Crushed Biotech ETFs with One Tweet ).

On the whole, branded drug prices underwent a rise of about 14.8% last year, as per research firm Truveris. There are several other drugs namely cycloserine, Isuprel, Nitropress, and doxycycline that have seen enormous price hikes this year, per the source . As a result, the drumbeat of losses for biotech stocks resumed in full volume on apprehensions of stringent government regulation on pricing matters.

What's in Store?

No wonder, sectors as important and sensitive as biotech and pharmaceutical should be in talks prior to the election season. Barrons.com notified that biotech and pharma stocks underperformed the broader market during the last four election cycles when comparing figures 3 months before to the primaries and 3 months after the elections (read: The Comprehensive Guide to Biotech ETFs ).

Barrons' analysis shows that the broader market indices including S&P 500, Dow Jones, and NASDAQ composite gained 11%, 8%, and 18%, respectively, on average against 15% and 1% loss incurred by the NASDAQ Biotech index and NYSE Arca Pharmaceutical Index, respectively during last four election phases.

Thus, like several analysts we too believe that the biotech space will likely remain flippant. However, the space should soar once these doubts clear up given the strong fundamentals and a compelling valuation especially after the recent sell-off.

Till everything settles, investors might intend to choose products with short-term notion. And what could be better options than inverse and leverage biotech ETFs to accomplish this notion? Due to their compounding effect, investors can enjoy higher returns for a very short period of time. Holding the product for long could lead to extreme losses.

Below, we have highlighted three ETFs in each case - both for bear and bull markets - that could deliver astounding gains, depending on the biotech market trend, easily crushing the broader market.

Bear Biotech ETFs - Inverse Leveraged

These products would be apt for the present beaten-down market environment.

UltraPro Short NASDAQ Biotechnology (ZBIO)

Leveraged Factor: (-)3x

Benchmark Index : NASDAQ Biotechnology Index

The index is a modified capitalization weighted and includes biotech or pharma securities listed on the NASDAQ. The ETF has amassed about $7.7 million in its asset base while charges 95 bps in fees per year from investors. The fund trades over 50,000 shares a day on average and added 29% in the last three months (as of September 24, 2015).

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

Leveraged Factor: (-)3x

Benchmark Index : S&P Biotechnology Select Industry Index

The fund has amassed about $18.7 million so far and trades in volumes of about 275,000 shares a day. This product also charges 95 bps in fees and added 19.5% in the last three months.

ProShares UltraShort Nasdaq Biotech (BIS)

Leveraged Factor: (-)2x

Benchmark Index : NASDAQ Biotechnology Index

This $171.6-million ETF trades in volumes of about 750,000 shares a day and charges 95 bps in fees. The fund surged over 21% in the last three months.

Bull Biotech ETFs - Leveraged

These products would suit investors on a biotech market recovery.

ProShares UltraPro Nasdaq Biotechnology (UBIO)

Leveraged Factor: 3x

Benchmark Index : NASDAQ Biotechnology Index

This $37-million ETF trades in volumes of about 275,000 shares a day and charges 95 bps in fees. The fund lost over 39% in the last three months.

Direxion Daily S&P Biotech Bull 3X ETF (LABU)

Leveraged Factor: 3x

Benchmark Index : S&P Biotechnology Select Industry

This $112-million ETF trades in volumes of about 600,000 shares a day and charges 95 bps in fees. The fund shed over 42% in the last three months.

ProShares Ultra Nasdaq Biotechnology (BIB)

Leveraged Factor: 2x

Benchmark Index : NASDAQ Biotechnology Index

This $786.1-million ETF trades in volumes of about one million shares a day and charges 95 bps in fees. The fund was down about 27% in the last three months.

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PRO-ULT SH ND B (ZBIO): ETF Research Reports

DIRX-D SP BBEAR (LABD): ETF Research Reports

PRO-ULS NDQ BIO (BIS): ETF Research Reports

PRO-ULT NDQ BIO (BIB): ETF Research Reports

PRO-ULT ND BI (UBIO): ETF Research Reports

DIRX-D SP BBULL (LABU): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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