BIB and LABU: Comparing Leveraged Biotech ETFs

The biotechnology industry has flourished in the past decade. Biotechnology companies use or modify biological processes to create new drugs or treatments. As many biotech companies around the world scramble to develop potential vaccines, the biotech industry has received particularly close attention. For many investors, biotechnology represents a real way to improve the lives of millions of people around the world.

Long-term investors who are optimistic about the industry may consider exchange-traded funds (ETFs) that track major biotech indexes. High-risk or short-term investors and day traders can gain more industry exposure through leveraged ETFs, which seek to return multiples of the industry’s benchmark returns.

Although some leveraged biotech ETFs performed well during the industry bull market, due to the inherent time decay of many leveraged products, such ETFs should only be held for a relatively short period of time. Here, we look at two popular leveraged biotech ETFs: BIB and LABU.

Key points

  • The biotechnology sector includes companies specializing in cutting-edge bioscience and medical equipment.
  • Given that biotech stocks have the potential to create life-saving treatments and fight diseases, it has great upside potential, but it also has a greater risk of failure.
  • Adding biotechnology to a diversified investment portfolio can add elements of growth, but choosing the right biotechnology stock may be accomplished overnight.
  • Leveraged ETFs that track the biotech industry on multiple bases are a good way to access the industry without having to choose individual stocks, but additional leverage will also increase their risk.

ProShares Ultra Nasdaq Biotechnology ETF (BIB)

ProShares Ultra Nasdaq Biotechnology ETF (BIB) was established on April 7, 2010. As of April 8, 2021, the fund’s total net assets were US$243.9 million. The fund is a traditional leveraged ETF that mainly holds swap contracts for its underlying index, the Nasdaq Biotechnology Index and the common stocks of the companies that make up the index. The fund tracks the performance of its underlying index and attempts to replicate a percentage of twice the index’s performance by investing in derivatives and common stocks.

As of April 8, 2021, the fund’s annual net expense ratio was 0.95%, slightly higher than the average 0.91% of the trading leveraged stock category. The fund has risen steadily since 2011. As the biotechnology industry benefits from the 2020 crisis, the fund has accelerated its rise in 2020. As of April 8, 2021, the average return of the fund over the past ten years exceeded 27%. Although the fund is highly risky due to the industries it covers and the use of leverage, it has performed significantly better than the market during this period.

The U.S. bioscience industry has 1.87 million employees. Measured by total output, the total economic impact on the economy is $2.6 trillion.

Direxion Daily S&P Biotech Bull 3X Fund (LABU)

Direxion Daily S&P Biotech Bull 3X Fund (LABU) is a leveraged ETF issued by Direxion on May 28, 2015. The fund is similar to the ProShares Ultra Biotech ETF and provides leverage exposure to its related indexes. The Direxion Daily S&P Biotech Bull 3X Fund aims to track Standard & Poor’s Biotech Select Industry Index and provide three times the daily percentage performance of the index through holding derivatives and common stocks.

As of April 8, 2021, LABU has assets under management of US$508.1 million. The fund is consulted by Rafferty Asset Management LLC, and its annual net expense ratio is 1.02%, which is slightly higher than the expense ratio of the aforementioned ProShares Ultra Biotech ETF. The fund’s performance is also good, because the biotechnology sector has continued to rise in the past decade, but its return rate has not exceeded the 2x ETF mentioned above. As of April 8, 2021, LABU’s average rate of return for the past five years was 23.8%.

Bottom line

Biotech is responsible for initiating hundreds of new drug trials and developing drugs that can cure or treat multiple diseases. This is an incredibly strong and exciting industry, so it’s no surprise that investors everywhere want to participate. With leveraged biotechnology ETFs, investors have the opportunity to gain multiple exposures in the industry while taking additional leverage risks.

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