A $4 Billion Biotech ETF Saw Exodus Before Gilead Hope Revival

(Bloomberg) -- Just before the rally in biotechnology stocks, a $4.1 billion industry ETF suffered its biggest exodus of 2020.

Traders pulled more than $462 million from State Street’s SPDR S&P Biotech exchange-traded fund, ticker XBI, on Tuesday -- the biggest outflow since December, according to data compiled by Bloomberg. A day later, the ETF rallied after one of its top holdings -- Gilead Sciences Inc. -- said early results from a U.S.-government run study showed its experimental drug to treat the coronavirus helped patients recover more quickly than standard care.

“While it’s not a cure-all, it’s progress,” said John Stoltzfus, the chief investment strategist at Oppenheimer & Co. “This is what the market has been looking for and expecting in these rallies.”

Another fund tracking the industry, BlackRock’s iShares Nasdaq Biotechnology ETF, or IBB, also had outflows on Tuesday before jumping as much as 2.1% a day later. The $7.9 billion fund -- which has Gilead as its largest holding -- extended a rally from a March 16 low to 33%, compared with an advance of 23% for the S&P 500 Index.

Still, the surge in biotechnology shares is leading to warning signs that the sector is overvalued. While there’s the potential payoff when a new medicine succeeds, developing new drugs isn’t easy as there’s risk of failure.

The rally “could bring us to a point of overvaluation pretty quickly,” Stoltzfus said. “We would suggest investors consider curbing their enthusiasm going into this.”

©2020 Bloomberg L.P.