Biotech ETFs in A Bull Market: Positioning for a Q4 Rally… Part 2..Update

Update-1… 3P September 17 after FED Says No Rate Hike-Biotechs Rally

NASDAQ up 0.8% after initial surge

Apparently biotech stocks are sensitive to interest rate hikes as many analysts have suggested. Biotech companies need a continual inflow of capital and would be sensitive to higher interest rates. An analyst came on CNBC this AM suggesting that cyclical stocks such as industrials would outperform more speculative stocks like biotech in a stronger economy with rising rates. Concerns about the global economy has created cross-concurrents affecting the FED decision.  Note that immediately after the FED holding rates unchanged, biotech stocks shot up with the XBI up 3% to the $80 level and the IBB up 2% though off highs for the day.

Healthcare stocks (XLV) also rallied up about 1.5% with energy and utilities also strong. We learned on Seeking Alpha about another ETF the SBIO up 4% today, the ALPS Medical Breakthrough ETF focused on emerging small cap companies with holdings like ANAC, HZNP and RARE.

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Biotech ETF Trends: What to watch for in a 2015 bull market

The biotech 15%+ correction and increased volatility has unnerved many investors and traders. Most biotech stocks and ETFs peaked in mid-July. Risk remains high due to macroeconomic concerns and recent weakness in the healthcare sector. Momentum is gone and many high-flying emerging stocks have been crushed.But the bull market is intact and since late last Friday buyers were coming into favored stocks.The biotech sector is still the market leader. Large cap biopharmaceutical stocks have been hit and many are in the red and should recover, but they are too earnings dependent to make huge moves in Q4 so we favor mid and small caps for trading and new positions. Mid-caps are favored because many have strong pipelines with potential for clinical breakthroughs and M&A action. Stock picking will get harder so for re-balancing portfolios and new positions consider ETFs. It is very difficult to track or analyze ETF holdings except to note style i.e. large cap, small cap, diagnostics, services etc.

If you believe we have bottomed in biotech for the year and that we are poised for the year-end rally, this could be a good time to accumulate positions. The action this week has been favorable but the technicals must hold in a sell-off.

Healthcare has the best of both worlds in this market: growth from biotech/devices and stability from services and tools.

Here is where we stand on major biotech ETFs:

FBT 116.5 up 14.2% YTD, IBB  352.86 up 16.4% YTD, XBI 76.84 up 23.7% YTD

Note: XBI has split 3:1 today.

Here is a summary of ETF trends to watch:

  1. The biotech sector is more dependent on healthcare economics so the Healthcare Select SPDR (XLV) needs to hold or move in tandem with biotech. XLV holdings include both biotech and large cap drugs: JNJ, PFE, GILD, MRK, AMGN etc.
  2. The small cap “equal weighted” SPDR S&P Biotech (XBI) continues to be the leader although it can be more volatile particularly in down markets. The holdings include more speculative stocks that are turned over rapidly probably with a lot of help from algorithms: ANAC, EXEL, KYTH, DVAX, SRPT etc.
  3. The iShares Nasdaq Biotechnology  (IBB) favors well known large caps among the top ten positions. Holdings include all the usual suspects adding up to 59% of total: CELG, AMGN, GILD, REGN, BIIB etc. It tracks the five-star Fidelity Biotechnology Portfolio Fund (FBIOX).
  4. The First Trust Arca NYSE (FBT) has shifted its strategy over the past year and has become broadly diversified with holdings in tools and services. Well known stocks include : INCY, VRTX, REGN, AMGN and diagnostic plays MYGN, QGEN.
  5. The technicals had rolled over into a downward channel but have recovered this week above the triple bottom for 2015 and at the SMA 200 (XBI).

Review the Rayno Biopharmaceutical Portfolio for new ideas and a comparison to the ETFs.

For new investors and rebalancing healthcare portfolios we would favor complementary positions such as a fund FBIOX or IBB for core with XBI as a complement. Review our previous articles on Life Science ETFs which provides information on additional healthcare funds and ETF performance.

Disclosure long FBIOX, GILD others and trading long/short XBI.

XBI SPDR S&P Biotech ETF daily Stock Chart

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