IPO Frenzy to Legislative Sparks: Biotech’s Wild Ride for Traders
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When it comes to tech lately, size matters. We’re talking about the Magnificent 7, of course (Apple Inc, Amazon.com Inc, Alphabet Inc, Microsoft Corporation, Tesla Inc, Meta Platforms Inc, and NVIDIA Corporation). But could another tech sector—biotech—be the place traders should now place their bets? The S&P Biotechnology Sector Select Index* is down marginally from its December 27 peak, despite strong rallies in the S&P 500 and Nasdaq 100. Bull markets are all about rotation, so if the broader indices keep marching higher biotech stocks may take the baton from their big tech counterparts.
Traders bullish on the biotech sector can potentially turbocharge any gains with the Direxion Daily Biotech Bull 3X Shares (Ticker: LABU), which seeks to provide daily investment results, before fees and expenses, of 300% of the performance of the S&P Biotechnology Sector Select Index.
Below is a daily chart of LABU as of February 2, 2024.
Source: StockCharts.com, as of February 2, 2024.
Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.
One indication biotech could be in for a short-term run is recent initial public offering (IPO)* activity, a crucial barometer of investor appetite for the sector. As industry publication Fierce Biotech noted, two companies—CG Oncology and ArriVent—saw robust demand for their shares when they debuted in late January. And in the former’s case, shares doubled on their first day of trading, a telltale sign of a sector with the potential for momentum.
Bears, meanwhile, can use the Direxion Daily Biotech Bear 3X Shares (Ticker: LABD), which seeks daily investment results, before fees and expenses, of -300% of the performance of the S&P Biotechnology Sector Select Index, to play any weakness in the sector.
Potential Catalysts for Short-Term Biotech Traders
Beyond more successful IPOs, here are some other key catalysts that could send biotech names soaring:
- M&A activity: The year is barely more than a month old but already there are indications that a wave of biotech mergers and acquisitions could be upon us. As The Wall Street Journal observed in early January, behemoth GSK agreed to buy Aiolos Bio for up to $1.4 billion to land a promising asthma drug. Meanwhile, pharma giant Novartis paid over $400 million for Calypso Biotech, a developer of drugs for celiac disease and immune disorders. If this trend continues, investors may start to bid up potential acquisition targets, giving a tailwind to the sector.
- Breakthrough trial results: One reason early-stage biotechs are so volatile is because the stocks are so dependent on good clinical trial results. A flurry of promising clinical breakthroughs in coming quarters could light a fire under drug developers’ stocks. For example, Amylyx (NASDAQ: AMLX) is set to report Phase 3 results for its ALS treatment in the second quarter.
- U.S. legislation: Recently introduced U.S. legislation would prohibit biotech companies affiliated with the Chinese government from receiving U.S. taxpayer funding. If this bill passes, U.S.-domiciled biotech firms may gain a competitive advantage.
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Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.
The "S&P Biotechnology Select Industry Index" is a product of S&P Dow Jones Indices LLC ("SPDJI"), and has been licensed for use by Rafferty Asset Management, LLC ("Rafferty"). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC ("S&P"); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Biotechnology Select Industry Index.
The S&P Biotechnology Select Industry Index (SPSIBITR) is provided by S&P Dow Jones Indices LLC and includes domestic companies from the biotechnology industry. The Index is a modified equal-weighted index that is designed to measure the performance of the biotechnology sub-industry based on the Global Industry Classification Standards (GICS). One cannot directly invest in an index.
Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. The Funds are non-diversified and include risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geography which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Tax Risk, and risks specific to the securities of the Biotechnology Industry and Healthcare Sector. Companies within the biotech industry invest heavily in research and development, which may not lead to commercially successful products. Additional risks include, for the Direxion Daily S&P Biotech Bull 3X Shares, Daily Index Correlation Risk, and for the Direxion Daily S&P Biotech Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.
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