Betting On A Biotech Bounce With A Familiar ETF

Count biotechnology stocks and exchange traded funds among the once high-flying market segments that are struggling to start 2016. Of the just over 270 ETFs that hit 52-week lows on Monday, six of those funds were dedicated biotech funds.

That ominous anecdote underscores the current fragility of global equity markets because with biotech conference season here, this usually one of the seasonally strong periods for biotech stocks and ETFs. However, the current biotech sector malaise makes ETFs such as the SPDR S&P Biotech ETF (NYSE:XBI) look like contrarian bets, but that is not necessarily a negative thing.

The $1.8 billion XBI, the third-largest biotech ETF by assets, is an equal-weight ETF with a well-known tilt smaller, more volatile biotech names. Even with the recent struggles, potential catalysts linger for XBI and rival biotech ETFs.

"The JPMorgan Health Care Conference runs from January 11-15 in San Francisco. It is historically deemed the most important industry-related conference of the year because it sets the tone for the next 12 months," said Rareview Macro Neil Azous in a note out Monday. "Additionally, given the uncertainty around the Presidential Election outcome and the impact on the industry many will be looking for a silver lining? For example, M&A activity, the announcement of a new drug, reaffirming earnings guidance, etc."

As Azous notes, XBI is not for the risk averse investor. A hallmark of many equal-weight ETFs is a tilt toward smaller stocks not present in cap-weighted funds. XBI's holdings have a weighted average market capitalization of $9.8 billion. As a result although XBI has been the best-performing biotech ETF over the past three years, it has also been the most volatile.

Still, investors willing to embrace that risk have been rewarded as XBI has been intimately levered to the catalysts driving biotech stocks higher, including a favorable FDA environment and plenty of mergers and acquisitions.

"If a number of key company provides good news and their share prices reject it we will look to take this position off immediately as that would tell us that regardless of sector rotation or positive fundamental news that this ETF, like most others, is simply too correlated to the S&P 500 index," said Azous.

For the trader willing to swing for the fences with biotech ETFs, there is the Direxion Daily S&P Biotech Bull 3X Shares (NYSE:LABU), an ETF that attempts to deliver triple the daily returns of XBI's underlying index. However, like XBI, LABU hit a 52-week low on Monday.