XBI - LABD: An Absolute Avoid

2024-01-05 17:56:37 ET

Summary

• Shorting and inverse bets don't work over time on average, making inverse funds like Direxion Daily S&P Biotech Bear 3X Shares ETF a big avoid.
• The LABD ETF is a triple-leveraged inverse ETF that focuses on the biotechnology sector and aims to profit from a decline in the value of the index it tracks.
• LABD is not suitable for long-term investment, incurs high costs, and experiences high volatility, making it a high-risk, high-reward investment.

Those who have followed me for some time know I constantly emphasize the point that shorting and inverse bets don't work over time on average. Sure - anyone can point to a small sample where betting on a downtrend through these means works, but the odds are against you, and your timing has to be perfect. Broadly speaking, that's why I don't like inverse funds. When you combined inverse funds with an already beaten down sector like Biotech, it leaves for likely large losses. That's why the Direxion Daily S&P Biotech Bear 3X Shares ETF ( LABD ) is a big avoid for me.

LABD is a triple-leveraged inverse Exchange Traded Fund, or ETF, that focuses on the biotechnology sector. Launched on May 28, 2015, its objective is to achieve daily investment results corresponding to three times the inverse (-3x) of the S&P Biotechnology Select Industry Index. This means that the ETF aims to profit from a decline in the value of the index it tracks.

How LABD Operates

LABD employs financial derivatives such as futures, options, and swaps to achieve its investment objectives. These instruments allow the ETF to leverage its exposure to the underlying index, amplifying both potential gains and losses.

However, it's important to note that this ETF is designed for short-term trading, not long-term investment. LABD's returns over periods longer than a single trading day won't necessarily be in direct or inverse proportion to the long-term performance of the index due to factors such as compounding and beta slippage. Volatiltiy hurts daily reset products, and given that Biotech tends to be volatile in general, the very nature of what the fund does is extremely difficult to make money with.

Holdings and Sector Composition

LABD's underlying index, the S&P Biotechnology Select Industry Index, primarily includes small-cap and mid-cap biotechnology firms. LABD basically holds swaps to get the inverse exposure is achieves daily.

Comparison with Similar ETFs

LABD is not the only inverse leveraged ETF in the biotechnology sector. For instance, its sister fund, the Direxion Daily S&P Biotech Bull 3X Shares ETF ( LABU ), seeks to deliver triple the daily performance of the same index. However, unlike LABD, LABU aims to profit from a rise in the index's value.

Another notable ETF is the SPDR S&P Biotech ETF (XBI), a non-leveraged fund that tracks the same index. Over a long time, XBI and LABD can yield drastically different returns due to their different investment strategies and leverages.

I don't like shorting, and I'm bullish on Biotech anyway. The only way I'd personally play it is with XBI, not LABU or LABD if I turned negative.

Pros and Cons of Investing in LABD

Pros

1. Potential for Significant Short-Term Profits: If the biotech sector declines, LABD can deliver substantial profits due to its triple-leverage structure.

2. Hedging Opportunities: LABD can serve as a useful hedge against a portfolio heavily weighted in biotech stocks.

Cons

1. High Volatility: Due to its triple-leverage and focus on the volatile biotech sector, LABD can experience significant price swings.

2. Unsuitable for Long-Term Investment: LABD is structured for daily investment results; holding it for longer periods can lead to substantial losses, especially in a rising market.

3. Costs: LABD incurs higher expenses due to its use of financial derivatives and its triple-leverage structure. It also has borrowing fees and must pay out any distributions, adding to the total cost of owning this ETF.

Conclusion: A High-Risk, High-Reward Investment

Direxion Daily S&P Biotech Bear 3X Shares ETF offers a unique, albeit risky, trading opportunity. Its triple-leveraged inverse structure allows it to profit from declines in the biotech sector. However, this also means it can suffer substantial losses when the sector rises. Furthermore, its structure makes it unsuitable for long-term investment.

This is a strong avoid for me. I'd rather not play with fire.

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