IBB - Biotech Continues To Struggle Against The Broad Market IBB Remains A Hold

2023-06-15 17:51:43 ET

Summary

• Biotech stocks have been largely out of relative favor in 2023.
• Amid possible market mean reversion and seasonal tailwinds, IBB's low P/E is a positive attribute.
• But poor absolute price action and relative performance weakness lead me to reiterate my hold rating.

The last few months have been dominated by mega-cap growth. Value, cyclical, and small-cap funds have caught just modest bids from time to time. Still, many strategists suggest a broadening out of the market rally over the coming summer months. BofA notes that stretches of poor breadth usually mean revert, and that thesis bodes well for the struggling biotech space.

Breadth Mean Reversion A Boon For Out Of Favor Spots?

Still, there is no getting past that 2023 has been lackluster for the risk-on biotech area. Larger in nature compared to the other popular industry fund, the SPDR S&P Biotech ETF ( XBI ), the iShares Biotechnology ETF ( IBB ) has been the relative loser. I reiterate my hold rating as we await better macro conditions and a bullish technical turn.

Lackluster Healthcare & Biotech Returns in 2023 So Far

According to the issuer , IBB offers investors exposure to the biotech industry within the broad US stock market. Targeting no more than a few hundred individual companies, it’s a liquid ETF that allows investors to express an industry view without having to take much stock-specific risk in the volatile biotech area.

IBB features a moderate 0.44% annual expense ratio and pays a small 0.25% annual dividend yield. It is a large fund with net assets under management of more than $7 billion as of June 14, 2023, while its 30-day median bid/ask spread is very tight at just two basis points. The 30-day average volume is near 1.5 million shares, leading to a typical daily dollar volume of $195 million, so tradeability is high.

The portfolio houses 270 individual equities but volatility is actually not all that high considering biotech’s reputation. Indeed, diversification results in a tame standard deviation of 18% - near the S&P 500’s average volatility reading. Its equity beta is just 0.7, so that underscores the argument that IBB can be beneficial for diversification purposes. And with a forward P/E of just 15.7, per iShares, biotech is rather cheap today.

Data from Morningstar show that IBB has a modest growth tilt while being primarily a mid and large-cap fund. There’s just 22% exposure to small caps. While very low on the yield meter, its momentum is considered elevated, but recent lackluster performance counters that point.

IBB: Portfolio & Factor Profiles

IBB’s top four positions make up about 30% of the total portfolio while the top 10 assets are more than half of the allocation, so it is somewhat top-heavy due to the market cap weighting scheme. If you are looking for more equal weight-like exposure, going with XBI might be preferable.

IBB: Top 10 Holdings

IBB has somewhat followed its seasonal trend when analyzing historical analogs from Equity Clock . The ETF bottomed for the year thus far in March and rallied into mid-April before falling back in May. Now the bulls are just waiting for the usual rally through mid-September. While that could happen, I see technical issues.

IBB: Seasonal Tailwinds Common In The Summer

The Technical Take

IBB continues to fight the $140 mark. Notice in the chart below that the fund held that spot on several dips in 2021, but then the bear market sunk its teeth into IBB by early 2022. A plunge to just above $100 in Q2 last year capped off a more than 40% drawdown. The bulls were only able to rally IBB back to the 2021 range lows, though. And that remains key resistance.

If we close above the $139 to $143 range, then a measured move price objective to about $180 would be in play based on the ascending triangle that has formed. Until then, however, IBB looks to be a hold on technicals. Cementing that assertion is the fact that IBB’s long-term 200-day moving average is flat, indicating no trend.

IBB: Ascending Triangle In Play, $140 Resistance

Here you can see just how badly IBB’s relative strength has been. While the fund is up fractionally from late March, the S&P 500 has handily outpaced biotech. So IBB’s relative strength has only gotten worse.

Biotech's Big Relative Losses In 2023 Persist

The Bottom Line

IBB sports a low earnings multiple, but poor absolute technical trends and relative price action remain obstacles for the risk-on ETF.

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