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How to Short Biotechnology Stocks with ETFs

The recent global market turmoil has not spared any corner of the equity investment world. The skyrocketing biotech sector, which had long been investors’ favorite destination, has also being hammered badly over the past week amid increased regulatory scrutiny.

The initial panic was triggered early last week when the Democratic presidential candidate Hillary Clinton tweeted about "price gouging" and laid out the proposal to combat skyrocketing drug prices. The tweet came on the heels of the massive price hike from $13.50 to $750 per pill overnight of a 63-year-old infectious disease drug – Daraprim - by Turing Pharmaceuticals, headed by ex-hedge fund manager Martin Shkreli.

The tweet led to a bloodbath in the biotech stocks and eroded about $40 billion in market value in a single trading session last Monday (read: How Hillary Clinton Crushed Biotech ETFs with One Tweet).

The rout worsened yesterday after Democratic leaders in Congress criticized another Canadian drug maker Valeant Pharmaceuticals International (VRX) for hefty price increases in two heart drugs – 212% for Isuprel and 525% for Nitropress. The move has sparked another wave of selling, pushing the ultra-popular iShares Nasdaq Biotechnology ETF (IBB) down by 6.3%, which represents the worst one-day performance in more than four years. With this, IBB plummeted nearly 18.5% in the last six trading days.

The sector entered into a bear territory last week and the latest slide is just adding to the heavy losses piled up in the space. The negative sentiment is likely to continue at least in the near term given increased fears of higher government regulation or pricing interference in the near future. This is because increasing regulatory pressure from lawmakers would compel the drug makers to limit the price increase on the drugs, which would in turn hurt their profitability.

Given this, investors could easily tap this bearish trend by considering a near-term short on the biotech sector. Fortunately, with the advent of ETFs, this is quite easy as there are few options to accomplish this task. Below we highlight them and some of the key differences between each (read: The 3 Key Factors in Biotech ETF Investing).

ProShares UltraShort Nasdaq Biotechnology ETF (BIS)

This fund seeks two times (2x) inverse exposure to the NASDAQ Biotechnology Index, charging 95 bps in fees. It has amassed $188.9 million in its asset base and trades in a solid volume of more than 650,000 shares per day on average. BIS gained 47% over the past six days.

Direxion Daily S&P Biotech Bear 3x Shares (LABD)

Investors having a more bearish view and a higher risk appetite could find LABD interesting. This product provides three times (3x) inverse exposure to the S&P Biotechnology Select Industry Index. It charges annual fees of 96 bps and trades in volume of nearly 233,000 shares. The fund has accumulated AUM of $19.3 million since its debut at the end of May and surged 89% in the same period (read: Guide to Inverse & Leveraged Biotech ETF Investing).

ProShares UltraProShort Nasdaq Biotechnology (ZBIO)

Like LABD, this fund also provides three times (3x) inverse exposure to the biotech sector but tracks the NASDAQ Biotechnology Index. It charges one bp lower in annual fees and trades in light volume of 55,000 shares a day on average. ZBIO is also a new product having attracted $8.2 million in AUM in just three months. The ETF is up over 75% in the past six days.

Bottom Line

As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Inverse Equity ETFs here).

Still, for ETF investors who are bearish on the biotech sector for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.

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ISHARES NDQ BIO (IBB): ETF Research Reports
VALEANT PHARMA (VRX): Free Stock Analysis Report
PRO-ULS NDQ BIO (BIS): ETF Research Reports
DIRX-D SP BBEAR (LABD): ETF Research Reports
PRO-ULT SH ND B (ZBIO): ETF Research Reports
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