ETF of the Week: S&P Biotech SPDRS ETF

There are traders who are 100% quantified who nevertheless make one totally discretionary call when it comes to qualifying stocks for potential trades: no biotechs allowed.

It doesn’t matter that the backtests that show significant short-term outperformance when stocks earn ratings upgrades to our “consider buying” level of 8, 9 or 10 out of 10 include biotechnology stocks. For some active investors and traders, the experience of having one biotech blow-up on them once – however long ago – can be enough for them to swear off the sector for good.

Fortunately, there is an alternative. For these traders, ETFs like the S&P Biotech SPDRS ETF (NYSE: XBI) give them the chance to trade the biotechs without having to take on the single-stock risk of any individual biotech stock.

The biotech ETFs operate very much like other equity ETFs, especially after earning major ratings upgrades. Note how XBI below reversed one-day after earning a ratings upgrade to 9 out of 10, and two days later, was not only back above its 5-day moving avearge (one show of strength), but had rallied to close with a 2-period RSI of more than 70 (not shown – learn more about the 2-period RSI here.

XBI chart

This is the kind of strength that traders who buy ETFs on weakness wait for. And in this case, whether the dynamic exit was the 5-day moving average cross or the 2-period RSI, the result was the same: a gain of more than 4% in two days for active investors who picked up shares of XBI on its upgrade to 9 out of 10 last week.

To learn more about trading exchange-traded funds using scale-in strategies like these, click here.

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