“Translation: The fluctuation of funds, the interest rate reduction cycle, AI empowerment, and the U.S. biotechnology sector are worth paying attention to.”
The stock prices of major tech companies have started to decline, and investors are shifting their focus towards small companies and the pharmaceutical industry. For example, that SPDR S&P Biotech ETF has recently surged significantly, even outperforming the Nasdaq.
Why is that? Many companies in the biotech sector are particularly sensitive to interest rates.
So, a rate cut by the Federal Reserve is a big positive for them.
Firstly, it becomes easier to obtain financing, as the cost of borrowing decreases.
There is an increase in merger and acquisition activities, as large companies are more willing to expand their territories in a low-interest rate environment.
Investors are more willing to take risks, as low interest rates make them more inclined to seek high-return investments.
There is an increase in research and development investment, as the cost of financing is low, allowing companies to allocate more money towards R&D.
Market liquidity improves, as a rate cut attracts more funds into the stock market.
In the long run, a rate cut can enhance market confidence, providing a stable investment environment for the biotech industry, which is conducive to long-term development.
Analyzing two historical cases:
After the 2008-2009 financial crisis, the Federal Reserve significantly lowered interest rates and implemented quantitative easing policies, benefiting the biotechnology industry significantly. The improvement in financing environment and increased market liquidity propelled companies’ research and innovation, leading to outstanding overall performance in the industry.
During the 2020 COVID-19 pandemic, the Federal Reserve swiftly lowered interest rates to near zero and implemented large-scale quantitative easing policies. Biotechnology companies, especially those involved in vaccine research and therapeutic drug development, garnered attention and investments, resulting in a very robust industry performance.
Looking back at past interest rate cycles, the performance of the biotechnology sector:
From 2001 to 2003, following the burst of the dot-com bubble, the biotechnology sector faced some challenges, but certain companies still performed exceptionally well, such as Amgen and Gilead.
During the global financial crisis of 2007-2008, the biotechnology sector demonstrated relative stability. Gilead Sciences stood out with its successful performance in antiviral drugs.
In 2019-2020, during the COVID-19 pandemic, the biotechnology sector’s performance was particularly impressive. The development of vaccines and treatment solutions drove strong growth in the sector. Moderna and Pfizer stood out in particular.
Key factors influencing sector performance include research and innovation, M&A activities, regulatory environment, and market sentiment.
With the support of AI, biotechnology can accelerate drug development, advance precision medicine, discover biomarkers, and optimize clinical trials.
Under the dual influence of AI and interest rate cycles, companies can enhance valuation, reduce financing costs, and increase market liquidity.
Here are two examples:
Moderna (MRNA): Moderna is a biotechnology company specializing in mRNA technology, which has achieved significant success in the development of the COVID-19 vaccine. The use of AI technology has accelerated the research and production of vaccines.
During the interest rate cut cycle in 2020, Moderna’s stock price surged significantly, rising from around $20 at the beginning of the year to around $100 by the end of the year, representing an increase of approximately 400%.
Illumina (ILMN): Illumina is a genetic sequencing company that leverages AI technology to enhance the speed and accuracy of genetic sequencing. AI technology has helped Illumina make breakthroughs in genomics research and precision medicine.
During the interest rate cut cycle from 2019 to 2020, Illumina’s stock price performed strongly, rising from around $300 at the beginning of 2019 to around $400 by the end of 2020, an increase of approximately 33%.
The dual benefits of AI and interest rate cuts have made the biotechnology industry a hot spot for investment.
Which ETFs are worth focusing on?
It is difficult to evaluate individual stocks, as the success of R&D pipelines is highly contingent. Therefore, the best way to invest in the biotechnology sector is to allocate funds to ETFs.
Primary biotechnology-related ETF
iShares Nasdaq Biotechnology ETF (IBB)：Track the NASDAQ Biotechnology Index. Holdings include large biotechnology companies such as Moderna, Amgen, Gilead Sciences, Regeneron, and others. Suitable for broad market participants looking to invest in the entire biotechnology sector.
SPDR S&P Biotech ETF (XBI)：Track the S&P Biotechnology Select Industry Index. It maintains a balanced portfolio, covering large, mid, and small-cap biotechnology companies, including many blue-chip companies such as Amgen, Gilead Sciences which recently gained popularity due to its HIV prevention drug, and Fosun Pharma. The high industry diversification helps reduce individual stock risk.
ARK Genomic Revolution ETF (ARKG)：A company focused on the genomics field. Its portfolio includes innovative companies such as CRISPR Therapeutics and Illumina. Suitable for investors interested in investing in the cutting-edge biotechnology sector.
VanEck Vectors Biotech ETF (BBH)：Track the MVIS U.S.-listed Biotech Index. The holdings are concentrated in large biotech companies, such as Amgen, Gilead Sciences, Biogen, etc.
Leveraged Biotechnology ETF
Direxion Daily S&P Biotech Bull 3X Shares (LABU)：Providing a 3x leveraged bullish exposure to the S&P Biotechnology Select Industry Index. High risk, high return, suitable for short-term traders.
ProShares Ultra Nasdaq Biotechnology ETF (BIB)：Providing a 2x bullish leverage on the NASDAQ Biotechnology Index. The relatively lower leverage ratio is suitable for medium-term to short-term holding.
Before choosing the right ETF, one should consider risks, maturity, market, and costs.
ETFs like IBB and XBI are suitable for long-term holding to diversify risks.
ARKG is quite suitable for investors who enjoy researching innovative technologies and genomics.
For traders who are quick to enter and exit the market and can tolerate high risks, leveraged ETFs like LABU and BIB may provide greater profit opportunities, but they come with high volatility and risks.
Disclaimer: The content of this article is for reference only and does not constitute investment advice. Investing involves risks, so caution is advised when entering the market.
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