Biotech ETFs Review

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Includes: LABU, SPXU, SPY
by: Peter F. Way, CFA

Summary

At a Biotech Stock Review reader’s request here are the Market-Makers’ coming near-term price range forecasts for nearly a dozen Biotech-holding Exchange Traded Funds.

About half of them are built around derivatives to leverage their price-change potentials, both long and short. The prior-forecast histories show the leverages work well for most, but not all.

When appraising the short ETF results, just imagine the algebraic signs of past price changes to be inverted, if being a long owner of the short-structured ETF is your intent.

In addition to our usual comparative market forecast data, we include the MM forecasts for 3x leveraged versions of SPY.

Instant Biotech Diversification – plus Long~Short strategy choices

Figure 1 is a parallel to the Figure 2 on Biotech stocks just published. It shows the Market-Makers’ current price range forecasts for the now-traded Exchange Traded Funds holding biotech stocks, or the derivatives so oriented, to provide leverage strategies for those investors so inclined. All column references are the same. Bull and Bear 3x leverage ETFs on SPY have been added in blue.

Figure 1

(All materials from blockdesk.com have been approved for use in this article.)

A comparison of the [K] and [R] columns in both articles’ tables indicates (for “long” positions) a considerable give-up of CAGRs by the ETFs, in a trade-off for the diversification of holdings. In many cases the Win Odds of the ETFs are an improvement over many of the less successful stocks. So, the avoidance of a sizable capital commitment to a single poor (in hindsight) stock choice is paid for by the “poor choice” small participation in a group of better-gaining stocks more frequently achieving group profits.

The inclusion of “short” position ETFs in this comparison complicates the presentation once the tables contemplate negative strategy benefits. But at the MM forecast price change level things are straight-forward. To picture that, here is a Reward~Risk trade-off map like the Biotech Stock Revue article’s Figure 1, comparing the [E] and [F] data from this article’s Figure 1.

Figure 2

Here, for example, the combination of market pricing and current expectations of possible higher coming prices for the 3x “short” position (SPXU) of SPY produces a high-gain, relatively low price drawdown exposure at location [10]. That may not be everyone’s market-price anticipation, but it presently controls betting in this ETF. Please note [H] Win Odds show only about a quarter of the ETF’s 138 prior forecasts like today’s worked out with the ETF’s price gaining over its entry price cost, producing a trivial net return of only +0.2%. SPXU’s forecast credibility ratio is almost nonexistent.

The up-to-down expectations for SPDR S&P500 Index ETF (SPY) are much calmer at location [2]. The more positive 3x Long position of UPRO at [5] reflects some of that negativity with smaller expected average price gains than SPY (3.7% vs. 6.5%) and larger average-size losses (-3.2% to -2.2%).

Conclusion

If future price performance of long stocks and ETFs is much like their priors of similar forecasts, then the top-ranked stock issues of the earlier article have more price gain power at hand than the best ETF price performers.

The gain potentials of Direxion Daily S&P Biotech Bull 3x ETF (LABU) have the greatest CAGR and bp/day wealth-building power of the biotech ETFs, but it comes with substantial downside price exposure, despite the built-in diversification of the ETF structure.

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided.