Betting Big on Biotech ETFs? Traders Leverage ETFs

MarketsETF Trends

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With biotechnology stocks and ETFs expected to remain areas of interest throughout 2018, risk-tolerant traders may want to consider examining leveraged ETFs as short times on the biotechnology space.

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ETF traders who are betting big on the biotechnology sector rebound have also utilized leveraged long options including the Direxion Daily S&P Biotech Bull Shares (NYSEArca: LABU), which takes the 3x or 300% daily performance of the S&P Biotechnology Select Industry Index.

LABU, one of the largest leveraged biotech ETFs, has a bearish equivalent: the Direxion Daily S&P Biotech Bear 3X Shares (NYSEArca: LABD). That ETF tries to deliver triple the daily inverse returns of the S&P Biotechnology Select Industry Index. That index is an equal-weight benchmark, meaning it leans toward mid- and small-cap biotech names.

The M&A Theme Activity

Mergers and acquisitions activity in the biotechnology arena is picking up in a big way to start 2018. Should that theme continue, short-term traders could potentially have ample opportunities to tap LABU.

The uptick in healthcare consolidation “isn’t exactly surprising considering how many biotech companies are flush with cash. 2017 saw $9 billion in venture money invested into biotechs, a 60% increase over 2016. Over $2.8 billion in venture capital was invested in the first two months of 2018. On top of that, the recent tax reform only further deepened these companies’ cash reserves,” according to Direxion.

On the other hand, the bearish LABD may present traders with chances to profit on the downside.

“For the bearish among us, there are several potential catalysts that could lead to a reversal in Biotech: mainly, the IPO window closing (preventing the sector from raising much-needed capital); a frothy VC market that could lead to out-of-whack valuations; or most importantly, that the drugs simply don’t work,” said Direxion.

Related: Biotech ETFs Pop on Celgene, Juno Deal

Flows data suggest that, in recent weeks, traders have been favoring LABU over the inverse LABD. However, those situations can change in a matter of days. Additionally, investors looking for buy-and-hold plays on biotechnology stocks, should stay away from leveraged ETFs. Leveraged funds are best used as daily instruments and should not be held for multiple weeks or months.

For more information on the biotech sector, visit our biotechnology category.

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