Leveraged Biotech ETFs: Buy LABU, Sell LABD

Summary

  • Starting with September 2021, LABU had a record sequence of nine consecutive months with negative returns.
  • During the biotech downtrend from September 2021 to April 2022, LABD has returned 207%.
  • During the biotech uptrend from April 2020 to January 2021, in only ten months, LABU has returned an amazing 460%.
  • I believe that the downtrend of the biotech sector is overdone and that a trend reversal to the upside is very likely.
  • Looking for more investing ideas like this one? Get them exclusively at Adaptive Momentum Investing. Learn More »

DNA Genetic Code Colorful Genome

ktsimage/iStock via Getty Images

Investment Thesis

The biotech sector has suffered its largest bear market in its history. There are strong indications that this sector is reversing its trend and that now is a good time for initiating a long position in it.

Biotech is one of the few industries currently outperforming the broad market. Its outperformance started in the middle of May, and it is now well established.

Relative strength XBI:SPY

www.stockcharts.com

Biotech Sector - Long Term Trends

The biotech sector has very strong long term trends, displaying large changes in investors' sentiment about this sector. See, as an illustration, the total return of XBI – the SPDR S&P Biotech ETF. From 3/2/2009 to 2/8/2021, XBI had an amazing return of 1,125%. During this 12-year long bull market, XBI had only four deep corrections in 2011, 2014, 2015 and 2018. Since its top on 2/8/2021, XBI has lost 64%, the largest drop in its history.

XBI

stockcharts.com

LABU And LABD Are 3X Leveraged Biotech ETFs

LABU and LABD were created on 5/28/2015. The daily returns of LABU are approximately 3X the returns of XBI. LABD is an inverse 3X leveraged ETF, and its daily returns are about -3X the returns of XBI.

In the figure below, we see the total return of LABU (red) and XBI (BLUE).

XBI and LABU

stockcharts.com

If one invested in XBI and in its 3X leveraged LABU at LABU’s inception on 5/28/2015, today on 6/24/2022, that investor would have realized a return of -0.81% in XBI and a devastating loss of 95.12 in LABU. This is a classic example of why it is not recommended to invest for long term in leveraged products. As a funny addition, the same investment in LABD would have produced a loss of 99.44%, dropping a $1,000 initial investment to $5.60.

Although the 3X leverage factor is not reliable over long periods of time, it is still possible to realize big returns by investing in LABU and LABD during long term trends. We will show some hypothetical examples.

Returns Over 3/17/2020 – 2/8/2021 Uptrend

LABU: 1020.55%

LABD: -97.31%

50% LABU + 50 LABD: 923.24%

LABU - LABD

stockcharts.com

Returns Over 11/3/2021 – 5/11/2022 Downtrend

LABU: -93.02%

LABD: 381.36%

50% LABU + 50 LABD: 288.34%

LABU -LABD

stockcharts.com

LABU – Double Bottom

XBI and LABU made a double bottom on 5/11 and 6/13.

LABU - LABD

stockcharts.com

Over the last two months, the biotech sector exhibited a double bottom, and it is likely undergoing a major trend reversal. Over the last five trading days, from June 16 to June 24, the biotech ETFs made the following returns:

XBI: 20.46%

LABD: -46.14%

LABU: 69.73%

Risks

In addition to the risk of investing in equities during a broad market bear market, investing in inverse and leveraged funds presents considerable challenges.

Both LABU and LABD are 3X leveraged and have high expense ratios: 0.96% for LABU and 1% for LABD. Leveraged ETFs are also suffering higher losses during periods of high volatility in the markets.

Because of the high risks associated with inverse and leveraged ETFs, investing in LABU and LABD are not suitable for long term investing. They require close monitoring and quick corrective measures to avoid big losses of capital.

Conclusion

There are many ways of how one can play the Biotech sector's long term trends. The easiest is to hold LABU when Biotech is in uptrend and hold LABD when Biotech is in downtrend. In this article, I presented examples when a correct/lucky selection of LABU or LABD would have produced outsized profits.

I showed that an alternative strategy of investing equally in LABU and LABD at the beginning of a new trend would have also produced excellent results.

LABU presents a profitable investing opportunity. LABU is a BUY.

Its inverse, LABD is a sell.

ADAPTIVE MOMENTUM INVESTING

Apply the results of our research to achieve superior returns while keeping losses manageable during severe market corrections.

Get access to our four portfolios:

  • High yield bond ETFs
  • Non-leveraged broad market ETFs
  • High 3X Leverage ETFs
  • Top Momentum Large-cap stocks

Sign up for a FREE TRIAL today

This article was written by

Toma Hentea profile picture
2.3K Followers
Monitor market state (risk on/off) for successful investing
I am a retired professor of Electrical and Computer Engineering. Since 2011 I have been active in the AAII Chicago South Suburban chapter. My investment objective is to achieve high returns over the long run while allowing occasional downside corrections. Investment decisions are based on quantitative fundamental factors that take into account valuations, earnings growth and price momentum. Market exposure is varied in accordance to the state of leading US and global economic indicators. Options and leverage are used to enhance the performance of my investments.

Disclosure: I/we have a beneficial long position in the shares of LABU either through stock ownership, options, or other derivatives. 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.

Recommended For You

Comments (17)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.