The culmination of sustained lower oil prices, fear of an imminent rate hike and weakness in China have indiscriminately plummeted all indices over the past week. These exogenous forces are ostensibly unrelated to the biotechnology cohort yet this group has been taken along for the downhill ride with the broader indices in lock-step. The biotechnology sector has been on an unprecedented performance streak in both annual and cumulative performance over the past 10 years and accentuated during the latest 5 year timeframe however lately this streak has been tested. The biotechnology sector can be highly volatile, however I posit that this cohort has not only established itself as a secular growth sector but these latest events are unrelated to the biotech sector and thus this recent correction may provide a unique opportunity to add to a current position or initiate a position over time as this correction unfolds. Based on annual and cumulative performance throughout both bear and bull markets, IBB (iShares Nasdaq Biotechnology) may provide the opportunity investors have been waiting for in the face of our current market conditions. IBB is down 15% from its 52-week high, shares have plunged from $400 to $340 per share during the recent market weakness, presenting a potential buying opportunity.
Case for a buying opportunity
In addition to case outlined above (e.g. highlighting the disconnect between the forces bringing down the broader indices and the biotechnology sector on a whole) the biotech sector has exhibited its resilience in both bear and bull markets with secular growth. The returns for IBB have been very impressive in both annual and cumulative performance, unparalleled by any major index. Over the past 10 and 5 year timeframes, IBB has posted cumulative returns of over 350% and 320%, respectively. These results are unrivaled by any major index, outperforming on a 10 year cumulative basis of 295%, 240% and 300% for the S&P 500, Nasdaq, and Dow Jones respectively (Figure 1). These returns are accentuated during the previous 5 years. IBB notched cumulative returns of 322%, outperforming the S&P 500, Nasdaq and Dow Jones by 246%, 216% and 267%, respectively (Figure 2). IBB has cumulatively outperformed all indices by roughly 3-fold and 2.5-fold over the 10 year and 5 year timeframes, respectively (Figures 1 and 2).
Figure 1 – Google Finance comparison of IBB returns relative to the S&P 500, Nasdaq, Dow Jones over the previous 10 years
Figure 2 – Google Finance comparison of IBB returns relative to the S&P 500, Nasdaq, Dow Jones over the previous 5 years
IBB has displayed impressive resilience in the face of the market crash in 2008, the bear markets of 2011 and the choppy market thus far in 2015. During the market crash of 2008, IBB posted an annual return of -12.2% while the S&P 500, Nasdaq and Dow Jones posted returns of -37.0%, -40.0% and -31.9%, respectively (Figure 3). During the bear market of 2011, IBB posted an annual return of 11.7% while the S&P 500, Nasdaq and Dow Jones posted returns of 2.1%, -0.8% and 8.4%, respectively (Figure 3). Thus far during the choppy market of 2015, IBB posted an annual return of 12% while the S&P 500, Nasdaq and Dow Jones posted returns of -5.3%, -1.4% and -8.7%, respectively (Figure 4). These data suggest that IBB outperforms during bear markets to establish itself as a secular growth sector.
Figure 3 – Morningstar comparison of IBB annual returns relative to the Nasdaq over the previous 10 years
Figure 4 – Google Finance comparison of IBB annual performance thus far in 2015 relative to the S&P 500, Nasdaq and Dow Jones
As the confluence of these broader forces seemingly disconnected in bringing down the biotechnology sector, it may be time to consider capitalizing on this correction via adding to existing positions or initiating a new position in this cohort given this unique opportunity. Data suggests, provided a long-term position that volatility within the biotech sector is negated by its long-term performance that is unparalleled by any major index. This sector provides high returns unrivaled by any major index with moderate risk (based on its resilience during the bear markets of 2008 and 2011 and thus far in 2015) and volatility. IBB may be providing investors with a great opportunity to add or initiate a position for any long portfolio desiring exposure to the biotechnology sector with a long-term time horizon given the recent market conditions.
INO.com Contributor - Biotech
Disclosure: The author currently holds shares of IBB and is long IBB. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses.