BIB Versus LABU: Comparing Leveraged Biotech ETFs

The biotech industry thrived between 2011 and April 19, 2016, and major indexes nearly tripled during this period. However, the industry has experienced large pullbacks during this time, specifically in 2015. Due to the macroeconomic slowdown, increased risks in the global equity market and concerns on industry regulations, major biotech indexes have fallen significantly between 2015 and 2016. The Standard & Poor's Biotechnology Select Industry Index, which tracks U.S. biotechnology companies, was down 26.9% between April 19, 2015, and April 19, 2016. The NASDAQ Biotechnology Index, which tracks biotechnology and pharmaceutical companies listed on NASDAQ, was down 21.71% between April 19, 2015, and April 19, 2016.

Long-term investors who are still bullish on the industry may consider exchange-traded funds (ETFs) tracking major biotechnology indexes. Highly risk-tolerant short-term investors and day traders are able to gain leveraged exposure to the industry with ETFs. Although some leveraged biotech ETFs have fared well during the industry's bull run, this type of ETF should only be held for one-day periods due to time decay of leveraged products.

The ProShares Ultra Biotechnology ETF (NYSEARCA: BIB) was issued by Invesco on April 7, 2010. As of April 19, 2016, the fund had total net assets of $483 million and was advised by ProShares Advisors LLC. The fund is a traditional leveraged ETF that primarily holds swap contracts on its underlying index, the NASDAQ Biotechnology Index, and common stock of companies comprising the index. The fund tracks the performance of its underlying index and seeks to replicate two times the percentage performance of the index through investments in derivatives and common stock.

As of April 20, 2016, the fund charged an annual net expense ratio of 0.95%, which was approximately 4% higher than the trading-leveraged equity category average of 0.91%. The fund enjoyed a meteoric rise between March 31, 2011, and March 31, 2016, during the bull run in the U.S. equity market. As of March 31, 2016, the fund was down 42.82% year to date (YTD).

However, it was up 32.82% since its inception. As of March 31, 2016, the fund had an average annual return of 36.78% since March 31, 2011. Additionally, it had an average annual volatility of 43.21% and a Sharpe ratio of 0.96 over the past five years. Although the fund carries a high degree of risk, it significantly outperformed assets that have returned the risk-free rate on a risk-adjusted basis between March 31, 2011, and March 31, 2016.

The Direxion Daily S&P Biotech Bull 3X Fund (NYSEARCA: LABU) is a leveraged ETF that was issued by Direxion on May 28, 2015. The fund is similar to the ProShares Ultra Biotech ETF and provides leveraged exposure to its underlying index. The Direxion Daily S&P Biotech Bull 3X Fund seeks to track the Standard & Poor's Biotech Select Industry Index and provide three times the daily percentage performance of the index by holding derivatives and common stock.

As of April 19, 2016, LABU had $252.8 million in assets under management (AUM). The fund is advised by Rafferty Asset Management LLC and charges an annual net expense ratio of 0.97%, which is slightly higher than that of the ProShares Ultra Biotech ETF. The fund did not partake in the remarkable bull run like the ProShares Ultra Biotech ETF, and therefore, the Direxion Daily S&P Biotech Bull 3X Fund does not have attractive returns. As of March 31, 2015, the fund was down 67.44% YTD, and it was down over 80% since its inception date. This is primarily due to the pullback in the biotech industry, which was primarily caused by global macroeconomic concerns and the potential increase in regulations within the industry.