SPDR S&P Biotech ETF: Of Headwinds And Tailwinds

Summary

• I had rated the SPDR S&P Biotech ETF as bullish in July 2020. The ETF’s price spiked by 51% thereafter, and later, regressed to its mean.
• Historical data reveal that the ETF delivered solid price gains in the long run, but current market conditions suggest that it faces many headwinds in the near term.
• The price data also reveal that the ETF has been a peer outperformer in the last 3–10 years.
• I do much more than just articles at The Lead-Lag Report: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

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"When you run against a headwind, your speed slows down and you have to push harder. You can feel the headwind. When you have a tailwind pushing you, it is a force that propels you forward." – Dolly Chugh

I had assigned a bullish rating to the SPDR S&P Biotech ETF (NYSEARCA:XBI) in July 2020, when it was quoting at about $115. The ETF went on to hit a high of $174 in August 2020 (a gain of 51%), before the selling kicked in. It now quotes at about $110 (as of December 2, 2021). At the time I had rated it as bullish, the biotech sector was getting propelled by tailwinds generated by COVID-19. Companies competed against each other and everyone wanted to be the first to develop a test, vaccine, or pill that worked on the virus.

The ETF has corrected majorly from its peak, and therefore, I decided to review its prospects to check whether it is investable.

Headwinds Faced by the Healthcare Sector

1. On November 2, 2021, the Biden Administration announced a Prescription Drug Pricing Plan that intends to make prescription drugs more affordable and allow Medicare to negotiate prices for expensive drugs. This is a negative for the sector and all biotech ETFs have reacted adversely. Going forward, the profitability of biotech companies, especially Big Pharma, is likely to decline.
2. As of October 15, 2021, investors who were aware of the Biden administration’s plans had pulled out $1.8 billion from the healthcare sector. The sector is not in favor anymore – well, not until the next deadly virus disrupts our way of life or till the stock prices of pharmaceutical companies bottom out.

Given the lack of interest in the biotech sector, it makes sense to analyze the long-term price momentum of XBI.

XBI’s Price Momentum Analysis

Image Source: TradingView

Between January 2006 (the fund’s inception) and February 2020 (the time when COVID-19 disrupted our markets), the ETF’s price grew by a whopping 735%, which translates to an average annual gain of 52.5% on a simple average basis. Between its inception date and today, December 3, 2021 (190 months), the ETF has gained 518%, which translates to a lower, but satisfactory, annual gain of 33% on a simple average basis. Between February 2020 and today, the ETF’s price has fallen by 28%.

There is just one conclusion from XBI’s price data – that XBI outperforms when held for the long term.

Portfolio Analysis

As of December 2, 2021, XBI has invested its assets in 188 stocks, with only about 12% of its assets invested in its top 10 holdings.

Image Source: XBI’s Website

XBI’s portfolio turnover ratio is a massive 74% as compared to the sector median of 30%. This implies that the fund flips about three-fourths of its holdings every year, which makes it more of a short-term or swing trading ETF. Given the dynamics of the biotech sector and the frequent news surrounding companies about innovations, discoveries, or mergers, etc., I believe that XBI’s portfolio-flipping strategy is a sound one.

I also believe that its risks are well diversified.

Dividend Yield

Image Source: Seeking Alpha

XBI is a growth fund and its dividend yield hardly matters. For the record, the ETF paid 43 cents as dividend in 2020 and has paid just 4 cents so far in 2021. Its dividend yield should not even be considered to determine its investable quotient, and hence I am ignoring it.

Summing Up

1. The biotech sector was shored up by the COVID-19 tailwinds in 2020. Subsequently, the sector peaked out and now it faces headwinds in the form of the Biden administration’s plan to cut drug prices.
2. Current market conditions suggest that XBI may pass through turbulence in the near term. That said, the ETF’s price momentum data suggest that it delivers a healthy return when held for the long term.
   
   Image Source: Custom Comparison at Seeking Alpha
3. Data also suggest that XBI is a peer outperformer when held for the long term. A quick comparison of its 3–10 year price performance as compared to that of its peers, the iShares Nasdaq Biotechnology ETF (IBB) and First Trust NYSE Arca Biotechnology Index ETF (FBT), reveals that XBI has solidly outperformed its peers in the long run (see the image above).

As the ETF’s price is likely to witness rough weather in the near term, short- and medium-term investors can consider keeping away.

However, long-term price data do suggest that the ETF makes the cut for calm and patient growth investors. Based on XBI’s price momentum since its inception and its portfolio-flipping strategy, I retain my bullish rating.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.