BIB Versus LABU: Comparing Leveraged Biotech ETFs

The biotech industry thrived over the past decade. Biotech companies use or modify biological processes in order to create new pharmaceuticals or therapies. The biotech sector has been particularly closely followed as a number of biotech companies around the world rushed to develop potential vaccines. For many investors, biotech represents a real way to improve life for millions of people around the world.

Long-term investors who are bullish on the industry may consider exchange-traded funds (ETFs) tracking major biotechnology indexes. Highly risk-tolerant or short-term investors and day traders are able to gain even more exposure to the industry with leveraged ETFs that seek to return multiples of the sector's baseline returns.

Although some leveraged biotech ETFs have fared well during the industry's bull run, this type of ETF should only be held for relatively short periods due to the time decay inherent in many leveraged products. Here, we look at two popular leveraged biotech ETFs: BIB and LABU.

ProShares Ultra Nasdaq Biotechnology ETF (BIB)

The ProShares Ultra Nasdaq Biotechnology ETF (BIB) inception date was April 7, 2010. As of April 8, 2021, the fund had total net assets of $243.9 million. The fund is a traditional leveraged ETF that primarily holds swap contracts on its underlying index, the NASDAQ Biotechnology Index, and common stock of companies comprising the index. The fund tracks the performance of its underlying index and seeks to replicate two times the percentage performance of the index through investments in derivatives and common stock.

As of April 8, 2021, the fund charged an annual net expense ratio of 0.95%, which is slightly higher than the trading-leveraged equity category average of 0.91%. The fund enjoyed a steady rise since 2011, with an acceleration into 2020 as the biotech sector benefitted from the 2020 crisis. As of April 8, 2021, the fund had returned an average of more than 27% over the previous ten years. Although the fund carries a high degree of risk due to the sector it covers and its use of leverage, it has significantly outperformed the market over this period.

Direxion Daily S&P Biotech Bull 3X Fund (LABU)

The Direxion Daily S&P Biotech Bull 3X Fund (LABU) is a leveraged ETF that was issued by Direxion on May 28, 2015. The fund is similar to the ProShares Ultra Biotech ETF and provides leveraged exposure to its underlying index. The Direxion Daily S&P Biotech Bull 3X Fund seeks to track the Standard & Poor's Biotech Select Industry Index and provide three times the daily percentage performance of the index by holding derivatives and common stock.

As of April 8, 2021, LABU had $508.1 million in assets under management. The fund is advised by Rafferty Asset Management LLC and charges an annual net expense ratio of 1.02%, which is slightly higher than that of the ProShares Ultra Biotech ETF above. The fund has also performed well as the biotech sector has risen over the past decade, but it has not returned more than the 2x ETF above. As of April 8, 2021, LABU had returned an average of 23.8% over the previous five years.

The Bottom Line

Biotech is responsible for launching hundreds of new drug trials and developing medicines that can cure or treat a host of diseases. This is an incredibly powerful and exciting industry to be a part of, and it's no surprise that investors everywhere want in on the action. With leveraged biotech ETFs, investors have the opportunity to gain multiplied exposure to the sector, but also while taking on the additional risk of leverage.