Hougan: Biotech ETFs In A Bubble

January 21, 2014

Biotech ETFs are going parabolic. Are they in a bubble, and when should you bail out?

The question of whether biotech is in a bubble has been top of mind for me over the past few weeks. The SPDR Biotech ETF (XBI | A-31) is up 75 percent in the past year, and more than 15 percent year-to-date. Other biotech ETFs like the iShares Nasdaq Biotech ETF (IBB | A-55) are up similar amounts.

Biotech

Chart courtesy of StockCharts.com

 

In a previous life, I was a biotech analyst for an actively managed mutual fund, so charts like this make me giddy. Being a biotech investor can be very rewarding. Stocks can jump 100 percent, 200 percent or 300 percent on a single day’s news. Just last week, one of XBI’s holdings—Intercept Pharmaceuticals—ran up 281 percent after getting positive news on its liver drug (as our friends at ETF Trends reported).

From a big-picture perspective, seeing biotech rally makes sense to me. This is a sector that saves lives and changes the way science works. It’s protected from patent expirations and attracts the best talent in the world.

But over recent years, investment returns have been hard to come by. Biotech lovers have seen big rallies come and go. It took more than 11 years of painful, sideways grinding for biotech to recover the levels it saw during the 1999/2000 bull era. Is the recent run-up recognition of 11 years of scientific progress? Or will the sector come crashing back to Earth as it has in the past?

BiotechLong

Chart courtesy of StockCharts.com

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