Too Late To Catch Biotech Rally As Trump Fears Subside?

With names like AbbVie ( ABBV ) and Celgene ( CELG ) on a tear the past week, many biotech sector ETFs hit 52-week or longer highs.

On Friday, they took a breather but retained the bulk of their big weekly gains. Most biotech funds are extended from their buy points , but several are still in or have pulled back into their respective buy zones.

For instance, iShares Nasdaq Biotechnology ( IBB ), which rose as much as 6.5% from its 303.84 entry, eased Friday and is near the top of its buy range. The $9.4 billion fund has rallied 19% this year through June 21, according to Morningstar Inc. That's well above the S&P 500's slight one-week decline and 10% YTD return for the same period.

BioShares Biotechnology Clinical Trials ( BBC ), up 31% YTD, is in buy range from a 24.31 cup-base entry. The $24.5 million fund is thinly traded with an average daily volume of about 12,000 shares.

VanEck Vectors Biotech ( BBH ), up nearly 20% for the year, was waffling near the top of the 5% buy zone from 123.25 entry. The 5-year-old fund has attracted $702.3 million in assets.

Analysts attributed the rally to subsiding drug-price concerns . Could there be further growth ahead?

"CFRA is positive fundamentally on the biotech industry and sees strong revenue growth in 2017 aided by a robust pipeline," Todd Rosenbluth, Director of ETF & Mutual Fund Research at CFRA, told IBD via email. "We have buy recommendations on ABBV, Amgen (AMGN), Biogen (BIIB), BioMarin Pharmaceutical (BMRN), CELG and Gilead Sciences (GILD)."

Those stocks all fall in the big-cap category, with market caps north of $16 billion.

"We are more favorable on larger-cap biotechs and as such think IBB offers the best exposure to these stocks," he said. "(Some) other ETFs offer more stock diversification and smaller cap exposure, which provides potential rewards, but also additional risk."

Leveraged ETFs, which try to magnify returns by doubling or tripling their benchmark index each day, posted double-digit gains in the week ended June 21. For instance, Direxion Daily S&P Biotech Bull 3X (LABU), which seeks investment results triple the performance of the S&P Biotechnology Select Industry Index, led with a 26% return, bringing its year-to-date haul to 113.9%.

ProShares UltraPro Nasdaq Biotechnology (UBIO), which aims for three times the Nasdaq Biotechnology Index's daily performance, rallied 20.8% on the week for a 60.4% YTD return. ProShares Ultra Nasdaq Biotechnology (BIB) scored a 13.7% gain for a 17.9% YTD return.

All three are well extended. While such leveraged plays can make for big gains when the going is good, they tend to carry higher risk than most traditional biotech sector funds.

On the other end of the spectrum are inverse ETFs, which are designed to give the opposite performance of the index they track. These funds provide a result similar to shorting the stocks in the index. The four shown in the accompanying chart have seen losses as biotechs have rallied. But they'd likely outperform if the sector heads south.

"We don't have a view on leveraged and inverse ETFs other than that investors can easily get hurt if they hold on to them too long," Rosenbluth said. "The risks are compounded much faster than investors can appreciate."


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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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