Given that a successful vaccine for COVID-19 plays a critical role in returning the world to its pre-pandemic self, it's not surprising that health care companies are developing more than 100 potential vaccines to treat the killer disease. Leading U.S. biotechnology companies Moderna, Inc. (MRNA) and Novavax, Inc. (NVAX), along with French pharmaceutical giant Sanofi (SNY), are three firms making encouraging process in their search for the elusive breakthrough.
Moderna and Novavax have received combined funding of more than $870 million to research and develop a successful vaccine, with both biotech companies undergoing trials on humans in the coming months. Moderna has indicated that, If all goes well, its Food and Drug Administration (FDA) fast-tracked vaccine could be in production as early as July. Meanwhile, Sanofi, which has teamed up with U.K.-based GlaxoSmithKline plc (GSK), intends to start clinical trials in the second half of the year and, if successful, produce over half a million doses in 2021.
Traders and investors can gain exposure to these biotech companies through the three exchange-traded funds (ETFs) outlined below. Let's review the specifics of each fund and discuss several tactical trading plays.
SPDR S&P Biotech ETF (XBI)
With net assets nearing $4 billion, the SPDR S&P Biotech ETF (XBI) aims to provide returns that correspond to the S&P Biotechnology Select Industry Index. Moderna commands the largest single stock allocation in the fund's portfolio of 123 holdings, with a weighting of 4.53%. An average three-cent spread and daily turnover of more than 8 million shares minimize slippage, while a competitive 0.35% management fee also makes buy-and-hold investing an option. XBI has returned 4.22% year to date and 14.42% over the past month as of May 18, 2020.
A bullish candlestick continuation pattern, known as "rising three methods," has formed above key support at $97.50, indicating further upside momentum. Those who decide to trade the fund at these levels should consider using a trailing stop to let profits run. Start by placing an initial stop-loss order underneath the pattern's low at $97.17 and move it under each higher swing low.
Invesco DWA Healthcare Momentum ETF (PTH)
Charging a 0.60% management fee, the Invesco DWA Healthcare Momentum ETF (PTH) tracks the performance of the Dorsey Wright Healthcare Technical Leaders Index – a benchmark comprising U.S. health care firms selected and weighted by price momentum. Although not strictly a biotech fund, the ETF allocates 42.25% of its $265.46 million asset base to the sector. The fund's basket holds about 45 stocks, with Novavax taking the top weighting at 7.81%. As of May 18, 2020, PTH has gained 14.28% on the year, adding nearly 18% in the past month alone.
PTH shares rallied to a fresh all-time high in less than two months after hitting their 52-week low on March 18. Following a three-day pullback, the price jumped nearly 4% Friday, suggesting that the fund is ready to resume its steep uptrend. Active traders who enter here should remain in their position until the price closes below the dotted blue trendline that extends back to the March low.
VanEck Vectors Pharmaceutical ETF (PPH)
Created in 2011, the VanEck Vectors Pharmaceutical ETF (PPH) has an investment mandate to provide similar returns to the MVIS US Listed Pharmaceutical 25 Index. The fund, which has an expense ratio of 0.36%, holds 216,632 shares of Sanofi, representing 4.48% of its net assets, while GlaxoSmithKline carries a similar weighting at 4.79%. Consider using limit orders rather than market orders when placing trades as liquidity can be sporadic at times. PPH offers a 1.79% dividend yield and has slipped almost 6% on the year as of May 18, 2020.
The ETF's share price sits 11.5% below its all-time high set in early February this year but has made an impressive V-shaped recovery from its pandemic sell-off low south of $50. More recently, the fund has traded within a tight pennant pattern above the 200-day simple moving average (SMA), possibly consolidating in readiness for a run to the all-time high. In terms of trade management, place a stop beneath the pattern's low at $58.91 and book profits if price tests the $67.60 all-time high.