Market Overview

Biotech Rally Stokes Activity In Leveraged ETFs

Biotech Rally Stokes Activity In Leveraged ETFs

About a year after reaching all-time highs, biotechnology exchange-traded funds are rallying after starting 2016 on dismal notes. Over the past month, the three largest U.S. biotechnology ETFs are up an average of almost 15 percent.


Predictably, the recent biotech rally is leading to increased activity in leveraged ETFs offering exposure to the sector, including the Direxion Daily S&P Biotech Bull 3X Shares (NYSE: LABU) and the Direxion Daily S&P Biotech Bear 3X Shares (NYSE: LABD).

LABU, the bullish member of the pair, is designed to deliver triple the daily returns of the S&P Biotechnology Select Industry Index. That index “includes domestic companies from the biotechnology industry. As of June 30, 2016, the companies included in the Index have a median market capitalization of $1.20 billion and an average market capitalization of $8.14 billion,” according to Direxion.

Related Link: A Neutral View On A Big Tech ETF

Election Rhetoric Weighs On Biotech

Previously, election year rhetoric dragged on the broader healthcare sector, but weighed particularly heavy on biotech stocks and ETFs. Democrat Hillary Clinton has been an obvious thorn in the sides of healthcare investors, proving that markets are speaking and that the advice that a Clinton victory is good for the healthcare is quite simply, awful advice.

To be fair, Republican front-runner Donald Trump has levied his own harsh rhetoric against high drug prices, so this election season is becoming increasingly tricky to navigate for healthcare investors.

Recently, it appears as though some traders have shelved concerns about the election's outcome and how it might affect biotech ETFs. With Wednesday's impressive performance, LABU is Direxion's best bullish leveraged ETF on a month-to-date basis with a gain of almost 18 percent.

Looking Ahead

Still, data suggest some traders think biotech's recent resurgence will be short-lived and that LABD, the bearish ETF, will resume its bullish ways.

For the five-day period ending August 3, LABD's volume was 51.3 percent above the trailing 20-day average while LABU experienced a more modest 11.2 percent volume increase over the same period, according to Direxion data.

Additionally, the data say traders are positioning for a rally in LABD as that ETF has averaged daily inflows of $264,500 over the past month, according to Direxion data.

That jibes with reports showing that the plain vanilla ETF tracking the S&P Biotechnology Select Industry Index bled $255 million in assets late last week.

That index is dominated by biomedical, genomics and pharmaceuticals makers but also features some exposure to therapeutics and medical equipment firms.

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