The Recent Bullish Trend in IBB, XBI Looks Shaky
The two biotech ETF products with around $8 billion in assets are IBB and XBI. At $133.36 on February 17, the iShares Biotechnology ETF (IBB) had $8.58 billion in assets under management. The S&P SPDR Biotech ETF (XBI), at $86.80, had $7.97 billion in assets.
Biotechnology companies develop products from extracting or manipulating living organisms for advancements in medicine, agriculture, crop production, and other sectors. While pharma produces drugs from chemicals, biotechnology employs living organisms.
A Different Approach
IBB’s holdings include many leading biotech companies, with holdings capped at 8% on the five largest constituents and 4% for the remaining holdings. Meanwhile, XBI equal weights its holdings, emphasizing small and micro-caps and reducing single-company risks.
IBB Outperformed, XBI underperformed the Benchmark in 2022
The S&P 500 is the most diversified U.S. stock market index and the standard for many investors measuring performance. In 2022, the index declined 19.44% as rising interest rates weighed on stocks.
IBB’s approach proved more effective in 2022, as it fell 14%, moving from $152.62 on December 31, 2021, to $131.29 per share on December 30, 2022. IBB outperformed the S&P 500 last year and did much better than XBI.
Carnage in small and micro-cap biotech stocks took XBI from $111.96 on December 31, 2021, to $83 per share at the end of 2022, a 25.9% decline. While XBI underperformed IBB and the S&P 500, it did better than the tech-heavy NASDAQ, which fell 33.1% last year.
They Have Not Kept Pace With the Benchmark in 2023
The S&P 500 was at the 4,079.09 level on February 20, 2023, up 6.24% from the 2022 closing level of 3,839.50.
Meanwhile, IBB at $133.36 per share was only 1.58% higher, and XBI at $86.80 was up 4.58% as the biotech ETFs lagged behind the overall stock market.
IBB, XBI Have Been Trending Higher Over the Past Months
The results since the end of last year have not been promising for IBB and XBI, but the trends suggest that a continuation of higher lows and higher highs could be on the horizon.
The chart shows the bullish price action since IBB reached a $104.29 bottom in June 2022 and has appreciated 26.7% since the low at $132.09 per share.
XBI rallied from $61.78 on May 12 to $86.80 per share on February 17, a 40.5% rise.
Meanwhile, the benchmark S&P 500 reached a low of 3,491.58 on October 13, 2022, and rose to 4,079.09 on February 17, a 16.83% increase. The tech-heavy Nasdaq composite moved from 10,092.94 on October 13 to 11,787.27, or 16.79% from the 2022 low. XBI and IBB outperformed the S&P 500 and the Nasdaq over the period, and XBI did better than IBB.
IWN, which follows the small-cap Russell 2000, moved from $162.50 on October 13, 2022, to $193.13 on Feb. 20, an 18.85% rise. The XBI holds small and microcap biotech stocks, which have outperformed the market over the past months.
Recessionary Pressures Could Derail the Rally
While the trend in biotech stocks has been bullish over the past months, several factors could derail the rally. A Feb. 10 Wall Street Journal article highlighted that layoffs and shutdowns are descending on biotech companies. Rising interest rates have taken a toll on funding.
The latest January consumer and producer price index data that came in hotter than expected could set the stage for further rate hikes at upcoming FOMC meetings. While higher rates tend to be bearish for all equity prices, biotech stands to lose the most because investors will be looking for higher returns making funding for new projects dry up. Moreover, biotech could take a backseat to other sectors as the pandemic fades into the market’s rearview mirror.
Biotech requires significant funding, and a recessionary environment would likely cause the companies to tighten their financial belts, resulting in layoffs.
While XBI and IBB have had great percentage runs since the May and June 2022 lows, the pattern of higher lows is in jeopardy as rates continue to rise.
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