2 Biotech Funds Poised for a Healthy Breakout

Biotech market expected to grow at 7.02% CAGR between 2019 and 2027

Biotech companies have grabbed headlines this month as they continue to play a critical role in the successful development of COVID-19 vaccines and treatments amid increasing case numbers across the country. Furthermore, significant regulatory and drug updates last week from industry leaders Regeneron Pharmaceuticals, Inc. (REGN), Gilead Sciences, Inc. (GILD), and Alnylam Pharmaceuticals, Inc. (ALNY) should keep the sector bubbling into year end.

Key Takeaways

  • Biotech stocks are likely to remain in focus through year end amid news surrounding COVID-19 vaccines and treatments.
  • The iShares Nasdaq Biotechnology ETF (IBB) tested the top trendline of a symmetrical triangle, with the price now sitting just 2.3% below its all-time high.
  • The Invesco Dynamic Biotechnology & Genome ETF (PBE) is trading within an ascending triangle continuation pattern that suggests a breakout to the upside.

In terms of industry growth, Fiormarkets research expects the global biotechnology market to almost double from $448 billion in 2019 to $833 billion in 2027, with a compound annual growth rate (CAGR) of 7.02%. Those who follow the group should monitor these two biotech exchange-traded funds (ETFs) that appear ready to break out to a new all-time high. Below, we review each fund's metrics and use technical analysis to identify possible upcoming trading plays.

iShares Nasdaq Biotechnology ETF (IBB)

With assets under management (AUM) of $8.76 billion, the fund has an investment mandate to closely track the performance of the NASDAQ Biotechnology Index. Regeneron, the ETF's top holding with a 7.15% weighting, last week received emergency use authorization from the Food and Drug Administration (FDA) for its antibody cocktail therapy to treat COVI9-19. The fund's portfolio also holds Massachusetts-based biotech Alnylam Pharmaceuticals, which recently scored FDA approval for its Oxlumo (lumasiran) injection to treat PH1 – a rare kidney disorder. Trading wise, the fund turns over nearly 2.7 million shares per day on razor-thin spreads to provide ample liquidity and minimal slippage. As of Nov. 30, 2020, IBB offers a modest 0.22% dividend yield and is trading 15.53% higher year to date.

IBB shares tested the top trendline of a symmetrical triangle Friday, with the price now sitting just 2.3% below its all-time high. Those who anticipate a breakout and enter at these levels should consider setting a profit target by measuring the pattern's width in points and adding that amount to a future breakout point – for example, adding $24 (width) to $143.60 (breakout point), which equals a profit target of $167.60. Traders could place a stop-loss order either beneath the 50-day simple moving average (SMA) or below the triangle's opposing side, depending on risk tolerance.

Chart depicting the share price of the iShares Nasdaq Biotechnology ETF (IBB)

A profit target is a predetermined point at which an investor will exit a trade in a profitable position. Profit targets are part of many trading strategies that investors and technical traders use to manage risk.

Invesco Dynamic Biotechnology & Genome ETF (PBE)

The $218.23 million fund aims to track the Dynamic Biotech & Genome Intellidex Index by investing at least 90% of its assets in securities that make up the benchmark. Biopharmaceutical giant Gilead Sciences, which commands a 4.18% weighting in the ETF's basket of 32 holdings, last week announced positive results from its Phase II and III CAPELLA study for the treatment of HIV. Although the fund is smaller in size than many segment rivals, it carries a competitive 0.58% management fee and keeps transaction costs down with an average three-cent spread. Still, it makes sense to use limit orders here, given the ETF turns over a dollar volume of less than $500,000 most trading days. PBE yields a tiny 0.05% and has gained 13.86% on the year as of Nov. 30, 2020.

Since trending 67% higher between March and July, the ETF's price has traded within an ascending triangle – a continuation pattern suggesting the likelihood of a breakout to the upside in the coming weeks. As with IBB, active traders should think about using the measured move method to project a profit target. In this instance, calculate the triangle's distance in dollars ($13) and add that figure to the pattern's top trendline ($63.50) for a take-profit order around $76.50. Manage risk with a stop placed somewhere under last week's consolidation low at $60.72.

Chart depicting the share price of the Invesco Dynamic Biotechnology & Genome ETF (PBE)

Consolidation refers to an asset oscillating between a well-defined pattern of trading levels. Consolidation is generally interpreted as market indecisiveness, which ends when the asset's price moves above or below the trading pattern. 

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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