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Preparing for Biotech ETF Retrenchment

Let’s quickly clarify that headline. We are not saying that a biotech bear market is imminent, nor are we endorsing the idea of immediately betting against biotech stocks and exchanges.

In recent years, such bets have rarely paid off. From 2012 through 2014, an average of three biotech ETFs were found among each year’s 10 best sector ETFs. This year, that number has swelled to six. Over the past five years, the iShares Nasdaq Biotechnology ETF (IBB) and the SPDR S&P Biotech ETF (XBI) has more than quadrupled.

What we are endorsing is being prepared, if need arises, from the bearish side with biotech ETFs. For the risk-tolerant trader, the Direxion Daily S&P Biotech Bear Shares (LABD) can help with that objective. The Direxion Daily S&P Biotech Bear Shares is the first triple-leveraged inverse biotech ETF. [Interesting Times for Biotech ETFs]

“But those who warn of a biotech bubble are correct to question whether the climb for the sector can continue. Will a strengthening dollar and weaker Euro make investors avoid U.S. drug companies? Most agree that currencies can make a difference in the short term, and traders may capitalize on that, but long-term success depends on bringing new drugs to market. Will the latest streak of drug approvals continue and will there be enough of them to carry the sector higher from here? What happens when biotech doesn’t produce results?,” according to a recent Direxion note.

LABD, which debuted on May 28, attempts to deliver triple the daily inverse returns of the S&P Biotechnology Select Industry Index, the underlying benchmark for XBI. LABD has a bullish cousin, the Direxion Daily S&P Biotech Bull Shares (LABU) , which has quickly gained a decent following. [Fast Start for a new Leveraged Biotech ETF]

LABD has competition in the form of the double-leveraged of the ProShares Ultrashort Nasdaq Biotechnology (BIS) , inverse answer to IBB. Each could prove rewarding in the event of a biotech pullback, but if such an event is triggered by smaller companies LABD could be the place to be because the equal-weight XBI is significantly more exposed to mid- and small-cap biotechs than the large-cap focused IBB.

“Biotech stocks, especially the smaller ones, have the natural built-in risk that bad news can cause share prices to plummet overnight, as in the case of Celladon Corp, when its advanced heart care study did not meet expectations. This decline served as a startling reminder to investors of the one-day decline potential inherent in biotech stocks,” adds Direxion. “And since biotech stocks have been a leading market sector, a decline in this space could be a warning shot for the entire market, so all investors and traders should be paying attention.”

Direxion Daily S&P Biotech Bear Shares