Biotech ETFs Back In The Spotlight

August 31, 2016

Biotech ETFs such as the iShares Nasdaq Biotechnology ETF (IBB) were trying to stage a recovery from two-plus-year lows earlier this year when a controversy involving Mylan and its decision to hike the price for EpiPens brought the segment’s rally to a screeching halt in the past week.

Mylan’s move to increase the price of its Epinephrine injections (the widely used EpiPens) to about $600 each (they cost about $100 in 2008, according to Reuters) triggered the fury of consumers and investors alike. The result was a sell-off in the biotech segment that sent IBB, the largest biotech ETF, down more than 4.3% in just five days.

The drop was twice as steep as the one faced by the broader health care sector, and four times as deep as the S&P 500 in the same period. The latest blow highlights just how far biotech has departed from the stellar performance we had seen from the health-care-leading segment in the past five years.

“We look at price trend,” Steve Blumenthal, chairman and chief executive officer of CMG Capital Management, said. “It is lagging this year. Biotech is much more volatile than most sectors—it’s just the nature of the asset class.”

Consider the chart below, which plots IBB’s five-year performance relative to the Health Care Select Sector SPDR (XLV) and the broader SPDR S&P 500 (SPY). The outsized gains are noteworthy: 

 

 

Biotech A Momentum Play

This week’s volatile plunge following Mylan’s action—one that elicited even commentary from presidential hopeful Hillary Clinton—is also a good reminder that biotech is a classic momentum trade.

Momentum stocks are those that have delivered strong relative performance in the recent past, and are likely to continue delivering strong gains in the near future. They are often high-risk investments, because at their core, momentum hinges on perfect timing. But as a factor, momentum doesn’t always outperform. No single factor ever does.

Chris Brightman, CIO of Research Affiliates, best described momentum investing in a recent piece, saying:

“Momentum investors are like the surfers we watch from beaches along the Pacific Coast. Both must catch a wave. Both attempt to ride it as it breaks. But the ability to glide away smoothly before being caught inside the inevitable crash(ing wave) that follows is what determines success.”

Biotech companies delivered investors an amazing wave in the past five years, shelling out 100 percentage points more in total returns than an investment in SPY, but these stocks, too, can correct, and dramatically at times.

Like any other high-risk play, investing in biotech companies—those at the edge of innovation and discovery—isn’t for investors afraid of a wild ride.

So far in 2016, the momentum trade has, by and large, underperformed the S&P 500 Index, as shown in the chart below through the performance of the iShares Edge MSCI USA Momentum Factor ETF (MTUM). Biotech has deeply underperformed on top of that. MTUM allocates about 16.2% to health care names. 

 

 

 

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