ETFs To Play As Biotech Juggles Election & Earnings

Biotech stocks had a tumultuous ride in the first half of 2016. Though the sector bounced back in July and recovered half of the losses, the rally fizzled again in late September due to worries over the upcoming election.

This is especially true as iShares Nasdaq Biotechnology ETF IBB, which tracks the Nasdaq Biotechnology Index, shed 8.3% over the past one-month compared with losses of 3.4% for the broad healthcare fund (XLV) and 0.5% for the broad market fund (SPY (NYSE:SPY)). The presidential debate so far has confirmed Clinton’s lead in the race. The NBC/Wall Street Journal poll after the second presidential debate showed Clinton leading Trump by 9 points (read: Prepare for a Clinton Presidency with These Stocks & ETFs).

Inside The Slide

Threats of a Hillary Clinton White House have eroded confidence in the sector as she has promised to curb the fast-rising prices of specialized drug treatments and has called for increased regulatory scrutiny that will likely pressure profits margins of biotech and drug companies. Just a year ago, Clinton’s tweet on "price gouging" led to a blood bath in biotech stocks and eroded about $40 billion in market value in a single trading day.

Several other factors have added to the weakness. The most notable among them is genomic sequencing company Illumina’s slashing of its third-quarter revenue guidance last week and its warning of a revenue miss. This news sent its share price down more than 25% in just one day, leading to sell-off in the biotech sector.

Stable Outlook

The steep decline has made biotech stocks cheaper given that IBB is down 21.2% in the year-to-date time frame. Additionally, the Q3 earnings outlook seems decent for healthcare, which is one of the eight sectors expecting growth. The sector is expected to post 2.7% earnings growth on 7.4% higher revenues, as per the Earnings Trends report (see: all the healthcare ETFs here).

Further, investors continue to pour money into biotech ETFs despite the recent weakness. In fact, IBB pulled in over $248 million in capital over the past one month. This suggests that investors still have an appetite for biotech stocks and ETFs. Moreover, the med-biomed/gene industry has a solid Zacks Rank in the top 41%, suggesting that the industry could outperform in the months to come.

How to Play?

Given a good earnings trend and uncertainty surrounding the election, biotech will likely see choppy trading in the near term. Investors could capitalize this opportune moment and could play the quick moves with ETFs.

Trade Election

Clinton maintains her lead over Trump ahead of the third presidential debate to be held on October 19, as per number of polls. A recent ABC News/Washington Post poll showed Clinton ahead of Trump by four percentage points while NBC News/Wall Street Journal survey found Clinton's lead much wider at 11%. As a result, investors could easily tap this trend with the help of inverse ETFs:

Direxion Daily S&P Biotech Bear 1x Shares LABS

This ETF provides inverse exposure to the performance of the S&P Biotechnology Select Industry Index. It has attracted $6 million in AUM and trades in paltry volume of about 1,000 shares on average. Expense ratio comes in at 0.45%. The fund added 6.6% over the past one month.

ProShares UltraShort Nasdaq Biotechnology ETF (AX:BIS)

This fund seeks two times (2x) inverse exposure to the NASDAQ Biotechnology Index, charging 95 bps in fees. It has amassed $79.4 million in its asset base and trades in a solid volume of more than 316,000 shares per day on average. BIS gained 18.2% over the past one month.

Direxion Daily S&P Biotech Bear 3x Shares LABD

Investors having a more bearish view and higher risk appetite could find LABD interesting. This product provides three times (3x) inverse exposure to the S&P Biotechnology Select Industry Index. It charges an annual fee of 95 bps and trades in volume of more than 2.4 million shares. The fund has accumulated AUM of $89.4 million and gained 22% in the same period (read: Biotech ETF Industry Outlook).

ProShares UltraPro Short Nasdaq Biotechnology ZBIO

Like LABD, this fund also provides three times inverse exposure to the biotech sector but tracks the NASDAQ Biotechnology Index. It charges a similar fee but trades in moderate volume of about 60,000 shares a day on average. ZBIO attracted $11.4 million in AUM and was up nearly 28% in the same period.

Trade Earnings

Most of the biotech companies are expected to come up with earnings surprises that would give a boost to their stock price. In particular, the top player in the industry Amgen (NASDAQ:AMGN) AMGN has a Zacks Rank #3 (Hold) and an Earnings ESP of +1.79%, suggesting a reasonable chance of beating the estimate. Additionally, Ultragenyx Pharmaceutical RARE and Sarepta Therapeutics SRPT have a Zacks Rank #3 each with an Earnings ESP of +1.92% and +0.74%, respectively, while Exelixis EXEL has a Zacks Rank #1 (Strong Buy) and an Earnings ESP of +15.38%.

In order to tap this, investors could bet on biotech ETFs cautiously or take advantage of the quick turn in sentiment with the help of leveraged ETFs:

VanEck Vectors Biotech ETF (CM:BBH)

This fund offers exposure to 26 large biotechnology corporations by tracking the MVIS US Listed Biotech 25 Index. Amgen occupies the top position in the basket with 12.4% share. The fund has amassed $548.7 million in its asset base while sees moderate trading volume of nearly 75,000 shares a day. It charges a reasonable 35 bps fee per year. The ETF shed 9.5% over the past month and has a Zacks Rank #3 with a High risk outlook.

SPDR S&P Biotech ETF XBI

With AUM of $2.4 billion and average daily volume of around 6.7 million shares, XBI is extremely liquid and an easily traded fund. It tracks the S&P Biotechnology Select Industry Index and provides exposure to 87 stocks with no concentration issue. Sarepta, Amgen, Ultragenyx and Exelixis collectively account for 11.6% of assets. It charges a relatively low fee of 35 bps a year for the exposure. The ETF lost about 8% in the same time frame and has a Zacks ETF Rank #3 with a High risk outlook (read: Inside the Recent Surge in Biotech ETFs).

ProShares Ultra Nasdaq Biotechnology ETF BIB

BIB is an excellent pick for investors seeking to make large profits in a short span. The fund creates a double leveraged long position in the NASDAQ Biotechnology Index while charging 95 bps in fees a year. It has $413.9 million in its asset base and sees solid volume of more than 672,000 shares a day in average. The ETF lost 17.3% over the past one month.

ProShares UltraPro Nasdaq Biotechnology ETF UBIO

This product follows the same index as that of BIB but offers three times inverse exposure with the same expense ratio. It has AUM of $33.2 million and average daily volume of 163,000 shares. UBIO was down 25.3% in the same period.

Direxion Daily S&P Biotech Bull 3x Shares LABU

This fund provides three times inverse exposure to the S&P Biotechnology Select Industry Index. It charges an annual fee of 95 bps and is more liquid than UBIO trading in volume of more than 3.8 million shares. The fund has accumulated AUM of $240.8 million and lost 24% in the same period.

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ISHARES NDQ BIO (IBB): ETF Research Reports

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

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

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

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

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

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

DIR-D SP BIO BR (LABS): ETF Research Reports

SPDR-SP BIOTECH (XBI): ETF Research Reports

VANECK-BIOTECH (BBH): ETF Research Reports

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