A Bad Week For Biotech Was Great For This ETF

U.S. stocks are faltering to start August and those declines are pressuring the high-flying biotechnology group. Entering Friday, six of the top 10 non-leveraged exchange traded funds on a year-to-date basis, including the top four, were biotech funds.

That group includes the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) and the SPDR S&P Biotech ETF (NYSE:XBI), the largest and third-largest biotech ETFs, respectively. At time of writing, IBB is sitting on a weekly loss of about 5.4 percent. XBI, which equal-weights its holdings, thereby giving the fund increased exposure to more volatile smaller biotech names, is off almost 10 percent this week.

Thanks to a pair of new inverse, leveraged biotech ETFs, traders have additional avenues for profiting from biotech pullbacks. For the risk-tolerant trader, the Direxion Daily S&P Biotech Bear 3X Shares (NYSE:LABD) is a good place to start.

The Direxion Daily S&P Biotech Bear 3X Shares debuted in late May as the first triple-leveraged biotech ETF to come to market. LABD attempts to deliver three times the daily performance of the S&P Biotechnology Select Industry Index, XBI's underlying benchmark.

Related Link: To Healthcare, With Leverage

At time of writing, LABD was doing exactly what it was supposed to do on Friday. XBI is off 4.5 percent while LABD is higher by 13.5 percent following a gain of almost 15.4 percent on Thursday. With Thursday's surge, LABD entered Friday as Direxion's top-performing triple-leveraged bearish ETF on a month-to-date basis, according to issuer data.

Biotech stocks, especially the smaller ones, have the natural built-in risk that bad news can cause share prices to plummet overnight, as in the case of Celladon Corp, when its advanced heart care study did not meet expectations. This decline served as a startling reminder to investors of the one-day decline potential inherent in biotech stocks, saidDirexion in a recent note.

It is not scientific, but here is a sign that LABD could continue to work in the near-term. Traders have a tendency to pile into leveraged ETFs that are faltering in hopes of a rally, while departing or ignoring the leveraged funds that are actually working for a given sector or index. That is happening this week with LABD and its bullish cousin, the Direxion Daily S&P Biotech Bull 3X Shares (NYSE:LABU).

Nearly $10 million has been added to LABU as that ETF has plunged but no new money has come into LABD.

And since biotech stocks have been a leading market sector, a decline in this space could be a warning shot for the entire market, so all investors and traders should be paying attention, adds Direxion.