05.11.2024 Issuer Call Redemption Notice

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Sandeep Rao

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BioTech ETFs: Market and Regional Analysis

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While the biotech sector had long enjoyed investors’ attention, it was never as pronounced as around the time the pandemic was felt around the world. However, as 2022 unravels, so has the interest, with a steady downward trend in stock valuations across the board. The reasons behind the ongoing market slowdown are complex and multifaceted. Let’s start with a broad analysis of the biotech sector.

Biotech ETFs and Regional Bias

Let’s consider 4 popular Exchange-Traded Funds (ETFs): the iShares Biotechnology ETF (IBB), the ARK Genomic Revolution ETF (ARKG), the Invesco Dynamic BioTech & Genome ETF (PBE) and the VanEck Biotech ETF (BBH). As of January 3 of this year, these 4 ETFs collectively accounted for nearly $16.2 billion in Assets Under Management (AUM).

Let’s consider a series of yearly “snapshots” in May of 2019 through 2021 – along with an additional snapshot at the dawn of this year as well as the end of April each. Companies incorporated in the U.S. and Canada as well as U.S./Canadian companies headquartered in Ireland, Cayman Islands or Jersey will be grouped into the “North America” region. Similarly, all companies from Europe (including the United Kingdom) will be grouped into the “Europe” region.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

There’s an interesting study of contrasts in the 2019 snapshot vis-à-vis the present: while ARKG has between 2 and 4 European companies in its holdings in the entire period, their weights were substantially higher than that in IBB which – with between 13 and 32 European companies in its holdings – has the largest number of European companies in holdings among the 4 ETFs. In the present day, this situation has reversed; IBB now has both the highest weight and number of European constituents while ARKG has the lowest average weight per European company.

ARKG’s investment methodology is proprietary, i.e. it isn’t publicly available unlike the other ETFs. Ark Invest buys into companies that it deems to have the edge necessary to be a disruptor while the other fund managers rely on objective numbers and set criteria. Almost all of the ETFs have a heavy concentration in stocks of companies based in the U.S. – home to the world’s most overvalued equity market.

A record 44% of fund managers responding to a monthly survey conducted by Bank of America Merrill Lynch in June 2017 considered U.S. equities to be overvalued. Deloitte’s surveys reported that most Fortune 500 CFOs and fund managers held this belief in 2020. Mr. Charlie Munger, Vice Chairman of Berkshire Hathaway, reiterated this in 2021 and added that the market will correct soon.

When it comes to equities at least, the overvaluation issue can be put in more stark terms when considering the ratio between stock prices and fundamentals. Given that IBB has by far the largest number of holdings on both sides of the Atlantic relative to the other 3 ETFs, let’s parse out the ratios across the “snapshot” dates of IBB for a clearer picture.

Ratio Analysis: Europe versus North America

Let’s consider three ratios comparing the stock price of IBB’s constituent companies to their fundamentals – the Price to Earnings (PE), the Price to Sales (PS) and the Price to Earnings (PS). These ratios can be imagined to form a 3-dimensional axis that would describe a plane along which the price is observed. Each axis, in theory, should have the same effect on the plane. In practice, this does not hold true.

The prospect of overvaluation has an interesting effect on these ratios as reported by data services such as Bloomberg: metrics that are too high or too low are not reported as they’re not considered to hold any meaningful information for the investor. Thus, the proportion of tickers with unreported PE ratios relative to total number of tickers is calculated in both regions as well as the ETF in total for each of the “snapshot” dates.

Given ETFs don’t have overall ratios, proximate aggregations of these metrics are carried out in two formats to arrive at an effective proxy for regional contribution:

  1. The average; wherein the reported ratios of each of the ETF’s constituents are averaged outright;

  2. The weighted-average; wherein the reported ratios have each constituent’s weight factored in.

The picture that emerges is quite interesting.

The core observations discernible are:

  1. The “Unreported PE Percentage” metric tended to be higher among European stocks than in North American stocks until recently, where they’re running nearly at par.

  2. After a brief spike in May 2020, European PE and PS aggregates tended to be lower than the North American equivalents in the average and of significantly lower contributory effect, as exemplified in the weighted-average.

  3. The outsized PS aggregates across both regions is an interesting feature of the biotech sector, indicating that revenues (and not earnings) have an outsized influence on stock valuation. This has been significantly more prevalent in North American stocks than in European stocks since 2020. In the most recent “snapshot”, it can be seen that European stocks have had a substantial cool-off relative to 2019, unlike North American stocks.

As of the most recent “snapshot” date, 30 of IBB’s 372 constituents were also among ARKG’s 49 constituents. Two of them are European – Switzerland-based Crispr Therapeutics AG and Germany-based Atai Life Sciences N.V. Furthermore, 26 of these have unreported PE Ratios –including Atai. Overall, 43 of ARKG’s constituents have unreported PE Ratios.

The massive preponderance of unreported PE ratios in both ETFs is an indicator of how overvalued the biotech sector is. Overvaluation influences volatility which, in the economic picture emerging, makes a continued downward trend more likely than the converse. As of March 31 of this year, Morningstar’s Star Rating system assigns ARKG a 1-star rating over a 3-year horizon and 2-star rating over a 5-year horizon. IBB does a little better (but not by much): 2 stars in both horizons as well as the 10-year horizon.

Gauging Investor Sentiment

Let’s now gauge investor sentiment via AUM trajectories between each “snapshot” date. May 2019 would be the “zero line”, i.e. relative to itself, the net change in AUM and price is zero.

Until 2022, ARKG’s AUM “deltas” relative to prices suggest stronger capital inflows than with the other 3. In 2022, ARKG is witnessing a substantially greater outflow than IBB and PBE while BBH’s AUM suggests that investors are holding steady.

This differential behaviour between BBH and IBB – both with market capitalization-driven constituent selection rules – lie in the “size effect”. Larger companies are expected to be more robust than smaller ones. Given the overvaluation, smaller overvalued companies are deemed more vulnerable than larger overvalued companies despite both categories facing downside risk.

In Conclusion

For equity investors, this sector would likely turn out to be less attractive until the floor for “ratio cool-offs” become more apparent. Those already invested in this sector would likely do well with an increased focus on diversification into classical themes such as energy or financials. Tactical investors in Europe have access to Exchange Traded Products (ETPs) to capitalize on stock trajectories in either direction for short-term plays. For instance, ARG3 and ARGS (on Euronext Amsterdam) give +3X and -3X exposure to the daily returns on ARKG respectively while 3IBB and SIBB do the same for IBB.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.

If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.

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The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.

This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.

Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.

This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.

United States Visitors

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.

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Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).

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Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.

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