This biotech ETF sees 'breakout' while U.S. small-cap technology stocks lag

By Christine Idzelis

DataTrek spots 'unusual' trend in small-cap tech stocks versus U.S. small-cap equities

Hello! This week's ETF Wrap digs into the jump in biotech funds, as well as an "unusual" trend in U.S. small-cap stocks versus small-cap tech equities.

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Some exchange-traded funds that buy biotech stocks are rallying in 2024.

The SPDR S&P Biotech ETF XBI, with $8 billion of assets under management, as well as two much smaller ETFs in the biotech category, Virtus LifeSci Biotech Clinical Trials ETF BBC and the ALPS Medical Breakthroughs ETF SBIO, have all seen big gains both in February and this year to date, said Aniket Ullal, head of ETF data and analytics at CFRA Research, in a phone interview on Thursday.

While the SPDR S&P Biotech ETF has seen "fairly strong flows" in the past month, they're "not off the charts" despite its surging performance this month, said Ullal. Shares of the fund have soared 12.6% in February for year-to-date gains of more than 10%, according to FactSet data.

"We're now seeing major components" within small-cap stocks like biotech and retail "breakout to two-year highs, which we think is a prelude to the small-cap index itself," said Jeff deGraaf, head of technical research at Renaissance Macro Research, in a note Thursday.

The SPDR S&P Biotech ETF and SPDR S&P Retail ETF XRT are "breaking out of big bases" with "internal momentum," said deGraaf. "Both groups are among the top performers at this zone in our Russell 2000 market cycle clock."

The Russell 2000 index, a gauge of U.S. small-cap stocks, has gained 1.4% this year through Thursday. Small-cap stocks are broadly lagging U.S. large-cap equities measured by the S&P 500 index SPX, which is up 6.8% so far in 2024, according to FactSet data.

Meanwhile, shares of the Virtus LifeSci Biotech Clinical Trials ETF, with $12 million of assets under management, have soared 18.5% in February, bringing their year-to-date gain to 23%. The ALPS Medical Breakthroughs ETF, which has $125 million of assets, has jumped 11.6% this month for an increase of 12.5% so far in 2024.

The much larger SPDR S&P Biotech ETF seeks to track an equal-weighted index of U.S. biotechnology stocks, with its largest holdings as of Feb. 28 being Viking Therapeutics Inc. (VKTX), Iovance Biotherapeutics Inc. (IOVA) and Cytokinetics Inc. (CYTK), according to data on the website of State Street Global Advisors.

Read: Viking Therapeutics' stock more than doubles as investors cheer cheap entry to weight-loss-drug craze

The fund has "broken out above its January high, resuming its long-term turnaround phase after a healthy period of digestion," Fairlead Strategies analysts, led by the firm's founder Katie Stockton, said in a note dated Feb. 27. "Next resistance is near $105."

Shares of SPDR S&P Biotech ETF fell 3.1% on Thursday, to $98.42.

As for fund flows, the SPDR S&P Biotech ETF has attracted more than $337 million in the past month as of Feb. 28, bringing its inflows this year to more than $92 million, FactSet data show.

Meanwhile, shares of the iShares Biotechnology ETF IBB, which also has $8 billion of assets under management, has gained just 0.7% in 2024.

But the iShares Biotechnology ETF tracks a market-cap-weighted index of biotech stocks listed in the U.S. Its top three holdings as of Feb. 28 were Vertex Pharmaceuticals Inc. (VRTX), Regeneron Pharmaceuticals Inc. (REGN) and Amgen Inc. (AMGN), according to the fund's data on BlackRock's website.

The SPDR S&P Biotech ETF has more of "a small-cap tilt" because it tracks an equal-weighted index of U.S. biotech stocks, said Ullal.

Information Technology

Small-cap stocks in information technology usually outperform small-cap equities overall, but they have "done the opposite by a statistically significant amount over the last 100 days," said Jessica Rabe, co-founder of DataTrek Research, in a note emailed Thursday.

That may mean a shift is coming.

"History says small-cap tech should therefore revert to the mean and outperform small caps generally over the next roughly four calendar months" said Rabe. "It's important to remember, however, that this is a relative, not an absolute return, analysis."

DataTrek found that the Invesco S&P SmallCap Information Technology ETF PSCT has lagged the iShares Core S&P Small Cap ETF IJR, which tracks the S&P Small Cap 600 index SML, by nine percentage points over the past 100 days. "This is very unusual," said Rabe.

Shares of the Invesco S&P SmallCap Information Technology ETF rose 0.9% in February, but they're still down 3.6% so far in 2024, according to FactSet data.

The fund's performance is trailing the year-to-date gains of the iShares Core S&P Small Cap ETF, whose shares jumped 3.2% in February to pare its year-to-date losses to 0.8%, FactSet data show.

Small-cap vs large-cap in tech

U.S. small-cap tech stocks are broadly lagging large-cap tech stocks, "but not by enough to flash a buy signal," according to DataTrek's Rabe.

The Technology Select Sector SPDR Fund XLK, an ETF tracking the S&P 500's tech stocks, climbed 4.7% this month for a year-to-date gain of 7.5%. By contrast, the Invesco S&P SmallCap Information Technology ETF is down 3.6% this year after edging 0.9% higher in February, FactSet data show.

DataTrek continues to favor large-cap tech - and U.S. large-cap equities generally over small-cap counterparts - in the "current mid-cycle market environment given their global scale and superior competitive advantages," according to the firm's note. "Also, large-cap tech is better positioned to keep leveraging structural growth trends like gen AI," said Rabe.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top performers                                                                                                                                                                       %Performance 
   ARK 21Shares Bitcoin ETF                                                                                                                                                             16.1 
   Bitwise Bitcoin ETF                                                                                                                                                                  16.0 
   Fidelity Wise Origin Bitcoin Fund                                                                                                                                                    16.0 
   iShares Bitcoin Trust                                                                                                                                                                15.9 
   Grayscale Bitcoin Trust                                                                                                                                                              15.9 
   Source: FactSet data through Wednesday, Feb. 28. Start date Feb. 22. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

...and the bad

   Bottom performers                                             %Performance 
   AdvisorShares Pure US Cannabis ETF                            -4.7 
   iShares MSCI Mexico ETF                                       -3.4 
   Schwab Fundamental Emerging Markets Large Company Index ETF   -2.3 
   abrdn Physical Platinum Shares ETF                            -2.2 
   iShares MSCI China ETF                                        -2.2 
   Source: FactSet 

New ETFs

Regan Capital said Feb. 28 that it launched the Regan Floating Rate MBS ETF MBSF, an actively managed fund that invests primarily in floating-rate agency residential mortgage-backed securities.DWS said Feb. 27 that it launched the Xtrackers RREEF Global Natural Resources ETF NRES, its first actively managed exchange-traded fund.iM Global Partner and Polen Capital said Feb. 22 that they plan to launch the actively managed Polen Capital International Growth (PCIG) and Polen Capital China Growth (PCCE) ETFs on March 8.

Weekly ETF reads

5 ways bitcoin ETFs are already changing how crypto is traded (MarketWatch)Bitcoin ETF Record Gets Broken Yet Again on $612 Million Inflow (Bloomberg)Bank of America's Merrill, Wells Fargo Offer Bitcoin ETF Products for Clients (Bloomberg)Grayscale lobbies SEC to approve options on spot bitcoin ETFs (Reuters)Investors poured $4tn into US ETFs over past decade (Financial Times)Synthetic convertible ETF aims at Magnificent Seven bond problem (Financial Times)

-Christine Idzelis

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02-29-24 1846ET

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