Biotech exchange traded funds (ETFs) rallied sharply amid speculation that Moderna Inc.'s (MRNA) COVID-19 vaccine would soon receive full Food and Drug Administration (FDA) approval after the federal agency gave rival Pfizer Inc.'s (PFE) double-dose shot the formal green light for those 16 and older.
- Moderna shares rose on hopes that the FDA would soon approve its COVID-19 vaccine.
- The SPDR S&P Biotech ETF (XBI) broke above a short-term trendline on increasing volume in a move that may drive follow-through buying over the next few weeks.
- iShares Biotechnology ETF (IBB) shares retraced to the 50-day simple moving average (SMA) and an uptrend line where they've subsequently found buying support in recent trading sessions.
Before yesterday's approval, the vaccine developed by Pfizer and German partner BioNTech SE (BNTX) had only received emergency authorization from the FDA to help bring the deadly virus under control. Moderna shares rose 7.6% after the news of the Pfizer authorization, as investors hoped that Moderna's vaccine would be next in line to be formally checked off by the FDA.
Below, we take a closer look at the sector's two largest ETFs that hold Moderna and turn to the charts to explore possible trading opportunities.
SPDR S&P Biotech ETF (XBI)
With an enormous asset base of over $7 billion, the SPDR S&P Biotech ETF (XBI) has an investment mandate to provide a similar return to the S&P Biotechnology Select Industry Index. The ETF holds 224,814 shares of Moderna, representing a 1.23% portfolio allocation. It also holds 234,603 units, or a 0.77% weighting, in fellow COVID-19 vaccine maker Novavax, Inc. (NVAX), which gained 8.71% Monday. Trading-wise, nearly 5 million XBI shares exchange hands each day on a narrow 0.02% average spread to minimize transaction costs. As of Aug. 24, 2021, XBI yields a modest 0.23% but is trading 9.26% lower since the start of the year, underperforming the broader healthcare sector over the same period by 24%.
More broadly, the XBI share price appears to be carving out a double bottom, with two swing lows forming at the $120 level roughly three months apart. Meanwhile, yesterday's rally saw the ETF break above a short-term trendline on increasing volume in a move that may drive follow-through buying over the next few weeks. Those who open a long position here should think about scaling out at key overhead resistance levels, $140 and $152.50, while setting a stop-loss order somewhere underneath Monday's low at $123.65.
A double bottom is a chart pattern that describes a change in trend and a momentum reversal from prior leading price action. It describes the drop of a stock or index, a rebound, another drop to the same or similar level as the original drop, and finally another rebound.
iShares Biotechnology ETF (IBB)
The iShares Biotechnology ETF (IBB) aims to track the performance of the ICE Biotechnology Index composed of U.S.-listed equities in the biotechnology sector. Both Moderna and BioNTech sit among the fund's top 10 holdings, with respective allocations of 9.73% and 4.58%. The ETF also provides exposure to Regeneron Pharmaceuticals, Inc. (REGN)—the biotech giant behind experimental COVID-19 treatment REGN-COV2, which former President Donald Trump received in October last year when he contracted the virus. On the trading front, an average daily dollar volume of $439.76 million and a 3-cent spread make the ETF suitable for short-term strategies. IBB controls nearly $11 billion in net assets and has gained 13.49% year to date, primarily due to topweight Moderna's near 300% parabolic gain since the start of the year.
After climbing to an all-time high earlier this month, IBB shares retraced to the 50-day simple moving average (SMA) and an uptrend line where they've subsequently found buying support in recent trading sessions. Those who buy at these levels should consider using a trailing stop to let profits run as far as possible. To do this, place an initial stop under this week's swing low at $164.27, raising it beneath each higher trough as the fund's price moves upwards.
"Let your profits run" is an expression that encourages traders to resist the tendency to sell profitable positions too early.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.