S&P Biotechnology ETF, the interest rate-sensitive 'King of Pharma'

1. Introduction: S&P Biotechnology ETF(159502.SZ, US stock: XBI, 3x long LABU$Direxion S&P Biotech Bull 3X(LABU.US) / short LABD), established by Harvest Fund at the end of last year(2023.12.26), tracks the S&P Biotechnology Select Industry Index(SPSIBI.SPI), with stocks weighted almost equally, T+0 trading, and an average daily turnover of 70.61 million, indicating sufficient liquidity.(as of 2024.04.30)

Data source: ETF Research, 20240430

2. Investment Logic

1. Investment Logic: Since I wrote about the logic of pharmaceutical investment at the end of last year👉(Nasdaq Biotechnology ETF, Live & Life), writing this article again seems redundant, so I delayed writing it. However, the S&P Biotechnology ETF is one I frequently use for mid-term volatility in the pharmaceutical sector.

As shown in the figure, compared to the Nasdaq Biotechnology ETF, the S&P Biotechnology ETF: ① selects companies registered in the US, ② has smaller market caps than those in the Nasdaq Biotechnology ETF, ③ benefits more from expectations of lower floating interest rates improving balance sheets, and ④ exhibits greater stock price volatility as interest costs decline and M&A activity in the primary market heats up.

2. Other Targets (LOF): There is another S&P Biotechnology LOF (161127.SZ) in the A-share cross-border ETF market, but it has low transparency in holdings and large pricing errors. After the launch of the S&P Biotechnology ETF, funds have flowed from the former to the latter.

3. Investment Observations: As shown below, the observation indicators are clearly stated. Last Friday (20240503), the non-farm payroll data came in below expectations, leading to earlier expectations of a Fed rate cut. The 10Y US Treasury yield started a downward trend. I emphasized repeatedly in my knowledge planet and this article (Nvidia NVDA dropped 10% overnight, S&P 500 Index .SPX corrected 5% deeply—should we cut losses or buy gradually?) that in a "soft landing" scenario, US stocks offer better value than US Treasuries. Simply put, TMF (20+ Year Treasury Bond ETF, Trying to Break the Investment "Impossible Triangle"?) is less attractive than the S&P 500 (S&P 500 Index (.SPX) Investment Logic).

① The S&P Pharmaceuticals sector has strong trends. Once a rally starts, it often leads to a strong upward movement. Factors involved include primary market financing enthusiasm, earnings drivers, and the impact of 10Y US Treasury yield fluctuations on valuation denominators for pharmaceutical stocks.

② Hong Kong pharmaceutical stocks are closely related to US pharmaceutical stocks (as shown below). Orders for Hong Kong innovative drugs are significantly affected by overseas markets, and some A-share pharmaceutical companies participate in overseas OEM.