Biotech ETFs: More Tricks Than Treats In October

by: Tom Lydon

Biotech exchange traded funds, market leaders for much of this year, stumbled in October as the government shutdown had an unexpectedly debilitating affect on the high-flying sub-industry.

The iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), which tracks large biotech or pharmaceutical companies listed on the Nasdaq, declined 3.3% in October. IBB is still up 51.1% year-to-date.

Biotechnology stocks have typically weathered the market storms, outperforming other areas during large macroeconomic problems. However, biotech ETFs plunged earlier in October at the height of the market volatility associated with the U.S. debt default scare.

The shutdown slowed U.S. Food and Drug Administration's normal drug approval cycle, a key driver of returns in biotechs.

Moreover, the slowdown in biotechs could be a sign that investors are concerned about valuations.

"We like to invest in companies with innovative products, but at reasonable prices. Biotech has become too rich for our tastes," Curt Gross, research director at FAI Wealth Management, said in a Wall Street Journal article.

Nevertheless, analysts point to strong fundamental drivers that are supporting the biotechnology sector.

"We aren't seeing any reasons to believe that the biotech market is facing any significant slowdown - the industry's pipeline for new drugs is strong and late-stage clinical trials are still very active," Christopher Raymond, a senior biotech analyst at Robert W. Baird & Co., said in the WSJ article.

Other biotech ETFs that declined in October include:

  • SPDR S&P Biotech ETF (NYSEARCA:XBI): down 8.9%; XBI equally weights its holdings, so the fund has a larger tilt toward smaller companies.
  • First Trust NYSE Arca Biotechnology Index Fund (NYSEARCA:FBT): down 2.0%; FBT also equally weights its holdings, but is home to just 20 stocks.
  • Market Vectors Biotech ETF (NYSEARCA:BBH): down 1.7%; BBH tracks the 25 largest U.S. listed biotech companies on the market.
  • PowerShares Dynamic Biotechnology & Genome Portfolio (NYSEARCA:PBE): down 0.4%; PBE selects a group of 30 biotech and genome stocks based on fundamental factors like price momentum, earnings momentum, quality, management action and value.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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