The two largest biotechnology ETFs are poised at a critical juncture in their troubled growth story. It may be too early to call a reversal in fortune, but they're certainly stock investment ideas once again.
SPDR S&P Biotech (XBI) on Thursday broke out of a first-stage base, climbing to its highest level since early June as industry giant Biogen (BIIB) trounced analyst estimates for profit and sales growth. The stock jumped 8% in heavy trading volume after reporting global growth from its multiple sclerosis and hemophilia businesses.
The largest biotech fund, iShares Nasdaq Biotechnology (IBB), could follow in XBI's footsteps this week by retaking its 200-day moving average. If it does so, and both ETFs manage to hold above that critical line of strength, it could suggest that investors are rekindling their love affair with biotech.
Earnings this week will play a part in the success or failure of that attempt. Industry heavyweight Gilead Sciences (GILD) reports Monday, Edwards Lifesciences (EW) on Tuesday and Amgen (AMGN) on Wednesday. Celgene (CELG) steps up Friday.
The SPDR biotech exchange traded fund is mired 31% below the price that investors were willing to pay for it a year ago. But it has rebounded 11% in the past month, outpacing virtually all other segments of the U.S. stock market.
Jeffrey Loo, an equity analyst at S&P Global Market Intelligence, considers the biotechnology subindustry attractively priced after a sharp sell-off. That, coupled with Biogen's solid report, may be behind the recent rally, he suggested.
IBD'S TAKE: Biotech exchange traded funds offer diversified exposure to a high-risk, high-reward industry, lowering single-stock risk. But fund investors should get to know the individual companies they own. To learn which stock is top rated in the biotechnology group, check out IBD Leaderboard.
In a March report, Loo wrote that the biotech industry would sustain healthy growth over the next several years. Breakthrough drugs like Gilead's Sovaldi and Harvoni for hepatitis C are helping to drive sales. Loo also has a positive outlook on an issue of key interest to investors:
"The industry pipeline is also solid as several drugs have blockbuster sales potential," he wrote.
One potential headwind in the coming months: the November elections. In an email to IBD, Loo noted that "the scrutiny over high drug prices" since the fall of 2015 had weighed heavily on biotechnology companies. Now Hillary Clinton, whose tweet on "price gouging" triggered that scrutiny, is poised to become the official Democratic candidate for next president of the United States.
IBB has seen assets shrink this year to $7.10 billion despite a net inflow of $357.7 million over the first six months of 2016. The fund holds 187 stocks and skews toward large caps such as Amgen and Celgene, as well as Gilead and Biogen.
XBI has also seen assets diminish in 2016, to $2.14 billion. It has taken in $164.6 million in new investor money over the first half of this year. It offers more exposure to smaller-cap names than IBB, as well as a lower expense ratio.
Their performance is neck-and-neck over longer periods of time. Both have produced an annual average 15% gain over the past 10 years.
By comparison, SPDR S&P 500, a proxy for the broad market, averaged an 8% gain over the same period.
