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How Will Biotechnology ETFs Finish Out the Year?

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The Biotechnology ETF world has been on a roller coaster ride this year. After peaking at the beginning of March, the space saw a huge sell-off until the middle of April, after which it has seen some recovery in the past two months.
Lofty valuations and regulatory concerns over drug pricing led the high flying Biotech stocks to give up to the forces of gravity to which these stocks had defied during their past five years of bull run.
The Plunge
The most popular product in the space – iShares Nasdaq Biotechnology Index Fund ((IBB - Free Report) ) – had shed roughly 20% since the beginning of March through the succeeding 6 weeks.
Apart from other Biotech stocks, which also started appearing quite-overvalued to investors, one of the most popular Biotech stocks, Gilead Sciences (GILD), suffered its worst setback during the period, also plunging by roughly 20%. The stock took a beating as U.S. lawmakers questioned the high price of its new hepatitis C drug, Sovaldi.
Not only did Gilead see its stock price bleed, other popular names in the space such as Celgene Corp (CELG), Biogen Idec Inc. (BIIB) and Amgen Inc. (AMGN) also plunged between 9% and 20%, over pricing concerns and biotech bubble fears (read: 3 ETFs Tumble Most on Biotech Sell-off).
The Rise
However, after this carnage, the over-sold Biotech stocks saw some relief and started bouncing back. The sell-off had indeed attracted a lot of investors to biotech firms, who viewed the recent price correction as a buying opportunity.
However, the major boost came after the second largest U.S. drug maker Merck ((MRK - Free Report) ) agreed to buy Idenix Pharmaceuticals (IDIX), a maker of hepatitis C drugs, for $3.85 billion. The news gave investors some relief and a conviction that the biotech sector has finally seen its worst. More importantly, investors were happy to see that the mergers-and-acquisitions theme was back in the space (read: Two Biotech ETFs Surge on Idenix-Merck Deal).
The major beneficiaries from the news turned out to be the SPDR S&P Biotech ETF (XBI - Free Report) and PowerShares Dynamic Biotechnology & Genome Portfolio (PBE - Free Report) , which saw huge gains after the Merck deal. In fact, XBI has been the top gainer in its space in the past four weeks, adding more than 20%, while PBE gained 15.4% in the past month and also is the top gainer in the year-to-date frame.
Apart from XBI and PBE, all other products in the space such as IBB and NYSE Arca Biotechnology Index Fund ((FBT - Free Report) ) recorded positive gains in the past one month.
However, the Biotech ETFs are lately facing some kind of technical resistance and have been unable to cross their previous highs made in March. It seems a consolidation in their prices is at play, with all the Biotech ETFs having delivered flat-to-negative returns in the past one week. Funds such as IBB and XBI are still trading roughly 10% below their 52-week highs.
In fact, many investors appear to be still bearish on this space, especially if we look at the percentage of the float that is sold short for the most popular ETF here. Currently, 39.39% of the float is sold short, suggesting an extreme level of bearishness for IBB (see all Healthcare ETFs here).
This can be further validated from the fact that apart from FBT, all the other biotech ETFs have seen net inflows since the start of the second quarter, as per data from
Is There Any Hope?
Although investors may remain jittery about the ongoing choppiness, fundamentals remain attractive. Strong pipelines, innovative treatments and impressive results should help the sector rally from the recent uncertainties (read: A Comprehensive Guide to Biotech ETFs).
Despite being volatile, the biotech sector and its ETFs are still clearly outpacing the broader market index from a year-to-date look.
The price correction, in fact, provides a good opportunity to invest in biotech ETFs. All the biotech ETFs discussed above have a top Zacks ETF Rank of ‘1’ or ‘2’, suggesting that these will likely outperform the broader market index over a one-year period.
Though the biotech space might see some more price consolidation or negative moves in the upcoming days, the long-term outlook still remains intact. Long-term investors can thus consider adding them to their portfolios, though keeping in mind that the Biotech ETFs carry a “High Risk” profile.
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