Investors turn on biotechnology as largest ETF in sector suffers record withdrawals

But analysts divided over longer-term prospects: Some see end of bull market while others see pause.
APR 23, 2014
Investors pulled a record $372 million from the biggest biotechnology exchange-traded fund in its worst day of redemptions ever. The withdrawals from the iShares Nasdaq Biotechnology ETF on April 4 were the most since its 2001 inception, with 7.5% of the fund's $4.98 billion in total assets leaving what is the biggest biotech-focused ETF, according to data compiled by Bloomberg. It follows a lengthy run-up in biotechnology industry stocks. Now, “that momentum money is being sucked out,” said Geoffrey Porges, an analyst with Sanford C. Bernstein & Co. Health-care ETFs have boomed this year, attracting more deposits than any other sector and adding $3.98 billion since Jan. 1. That increase has been spurred by a biotechnology sector that last year gained 74%, compared with a 30% increase in the S&P 500. Recently, investors have begun to question whether biotechnology stocks are in a bubble and whether the companies developing complex and often expensive medicines are worth their high valuations. After gaining 11% in January and February, the Standard & Poor's 500 Biotechnology Index has fallen 11% since March 3. 'FINAL INNINGS' “We consider the sector's run-up, which has been remarkable, to be getting into its very final innings,” Mr. Porges said. Stocks could be set for a significant move downward, especially if generalist investors decide to leave, he said. Robyn Karnauskas, an analyst with Deutsche Bank AG, disagrees. “The way I see it, I think we've turned the corner,” she said. “I don't see this as downside. When the fundamentals are strong and you have catalysts like earnings, I don't think we're headed for a bear period.” The Nasdaq Biotechnology exchange-traded fund, also known as the IBB, is made up of the shares for 122 biotechnology and medical companies including its biggest holdings — Amgen Inc., Gilead Sciences Inc. and Celgene Corp. The SPDR S&P Biotech ETF also had its worst day since May 2010 on April 4 as investors pulled $80 million, or 6.6% of assets. PESSIMISTIC INVESTORS There are other signs investors are pessimistic. In the Nasdaq Biotechnology ETF, 15% of all the shares outstanding — $665 million worth — are short, meaning investors have bet they'll fall in value, according to data compiled by Bloomberg and Markit Group Ltd. Other health-care focused ETFs with more diversified assets didn't see similar withdrawals. For example, the Health Care Select Sector SPDR Fund, which also has pharmaceuticals and health-care products and services stocks, gained $90 million on the biotech ETF's worst day. Some of that may be profit-taking near the end of the quarter, said Paul Weisbruch, a vice president at Street One Financial. “It's a reflection of, probably, end-of-the-quarter selling of the winners if you will, because biotechs have done really well,” he said. His firm analyzes and trades ETFs. Investors aren't just moving out of biotech funds, they're also exiting more volatile sectors that haven't fared well recently, he said. Industries with high volatility are what “you see selling off — small caps, social media,” Mr. Weisbruch said. “As fast as it went up, it's coming down.” (Bloomberg News)

Latest News

SEC to lose Hester Peirce, deepening a commissioner crisis
SEC to lose Hester Peirce, deepening a commissioner crisis

The "Crypto Mom" departure would leave the SEC commission with just two members and no Democratic commissioners on the panel.

Florida B-D, RIA owner pitches bold long-term plan to sell to advisors
Florida B-D, RIA owner pitches bold long-term plan to sell to advisors

IFP Securities’ owner, Bill Hamm, has a long-term plan for the firm and its 279 financial advisors.

Fintech bytes: Vanilla, Wealth.com forge new estate planning partnerships
Fintech bytes: Vanilla, Wealth.com forge new estate planning partnerships

Meanwhile, a Osaic and Envestnet ink a new adaptive wealthtech partnership to better support the firm's 10,000-plus advisors, and RIA-focused VastAdvisor unveils native integrations with leading CRMs.

Fiduciary failure: Ex-advisor who sold practice fined after clients lost millions
Fiduciary failure: Ex-advisor who sold practice fined after clients lost millions

A former Alabama investment advisor and ex-Kestra rep has been permanently barred and penalized after clients he promised to protect got caught in a $2.6 million fraud.

Why the evolution of ETFs is changing the due diligence equation
Why the evolution of ETFs is changing the due diligence equation

As more active strategies get packaged into the ETF wrapper, advisors and investors have to look beyond expense ratios as the benchmark for value.

SPONSORED Are hedge funds the missing ingredient?

Wellington explores how multi strategy hedge funds may enhance diversification

SPONSORED Beyond wealth management: Why the future of advice is becoming more human

As technical expertise becomes increasingly commoditized, advisors who can integrate strategy, relationships, and specialized expertise into a cohesive client experience will define the next era of wealth management