The Xchange Blog

If You Went Away in May: Energy & Biotech

Will the Energy Sector Wilt in the Heat?   

One of the worst-performing sectors since the election has been Energy.  But we know that OPEC and supply and demand dynamics have a lot to do with how well Energy does in any timeframe, no matter what election has happened or what season it is.  Still, energy does tend to lag even more in the summer.  Maybe it has something to do with buying up until the driving season starts on Memorial Day and then selling afterward. The volatility is not as great, but the gap between the summer month average -0.35% and the full year (0.74%) is more than a full percentage point. 

Energy Sector’s Sumer Months Performance

  June July August Summer Average Full Year Average
Returns (YoY per month) -0.28% 0.08% -0.85% -0.35% 0.74%

S&P Energy Sector GICS Level 1 Index.  Source: Bloomberg. Past performance is not indicative of future returns.

 

It might be a surprise to see Energy buck its own poor seasonal track record as well as its recent underperformance. 

 

Direxion Daily Energy Bull 3X Shares Performance (1/1/2017 – 6/5/2017)

Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For the most recent month-end performance please visit the funds website at direxioninvestments.com. One cannot invest directly in an index.

2016 proved fruitful for the energy sector with an improvement in oil prices. The sector rose around 25% for the year. However, since the elections, the sector has seen a declining trend owing to negative earnings in some energy stocks. The sector has fallen since the elections.

 

Can Trump’s proposed energy policy benefit the sector?

President Trump aims to lift regulatory restrictions on crude oil and natural gas exploration and production and devote more federal land to crude oil and natural gas drilling. He also supports increasing the production of fossil fuels like coal, crude oil, and natural gas. These policies could benefit the energy sector in the near future. Any unanticipated decisions from OPEC in 2017 could bring a change in crude oil price movement.

 

Will Biotech Stay Healthy This Summer?

In the past, Biotech has stayed positive during the summer months and have outperformed the S&P 500. This is again somewhat surprising, as many people think of summer as a risk-off time when in fact it is a good time to stay invested in Biotechnology stocks historically.  The sector has done well since the election despite Donald Trump’s considerable rhetoric talking down drug prices. It jumped massively the day after the election, as many thought Hillary Clinton would have been tougher on drug companies.  Recently the index has given some back.  Here are the summer returns for Biotech:

Biotech Sector’s Sumer Months Performance

  June July August Summer Average Full Year Average
Returns (YoY per month) -0.44% 0.74% -0.63% 0.18% 0.71%

S&P Biotechnology Industry Sector GICS Level 3 Index. 
Source: Bloomberg. Past performance is not indicative of future returns.

 

Biotech stocks tend to cool off during summer

The table above shows that on average, biotech has had positive returns during the summer months.

The more general health care sector has been the most challenged sector since Donald Trump’s presidential campaign, as it has been a significant topic of discussion. Fear arose from Trump’s administrative plans to revive the health care sector, as his first executive order after being sworn in as president was to take prompt action to repeal the Affordable Care Act (or ACA). These actions could affect hospital stocks adversely while benefiting life science companies and pharmaceuticals.

Despite the fact that President Trump plans to allow US manufactured drugs to be reimported and to require price transparency from all health care providers could affect hospitals and drug manufacturers, the biotech sector (XBI) has risen since the election. The overall health care sector, on the other hand, has risen less.

 

Direxion Daily S&P Biotech Bull 3X Shares Performance (1/1/2017 – 6/5/2017)

Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For the most recent month-end performance please visit the funds website at direxioninvestments.com. One cannot invest directly in an index.

 

The Bottom Line: Summer returns aren’t all bad, but sectors matter

As the S&P 500 is hovering at all-time highs, the energy sector can’t seem to catch a break.  But as always in trading, returns are never like the averages and never just like the past. This year more than most, exogenous (mainly regulatory) forces can have an outsized effect on the markets and sectors.  So whether you want to bet on seasonality, policy, or simply earnings growth, Direxion has a range of Leveraged ETFs to express your trading views from the beach this summer.

Other “Sell in May” Xchange Articles: A look at Financials, US Large CapsSemiconductors performance in summer months.

 

 


Performance (as of 3/31/2017)

    1M % 3M % YTD % 1Y % 3Y % 5Y % Since Inception Inception Date Expense Ratio* % (Gross / Net)
ERX  NAV -5.31 -20.47 -20.47 34.94 -29.75 -9.24 -5.85 11/6/2008

1.09/1.08

Market Close -5.37 -20.52 -20.52 34.87 -29.73 -9.17 -5.85
ERY NAV 2.99 18.93 18.93 -48.44 -15.42 -27.89 -45.28 11/6/2008 1.15 / 1.09
Market Price 2.99 19.31 19.31 -48.44 -15.39 -27.94 -45.28
IXETR Benchmark Index -1.44 -6.54 -6.54 15.9  -5.27 1.92      
LABU  NAV -5.25 52.78 52.78 73.47     -48.02 5/28/2015   1.11 / 1.09 
Market Close -5.39 52.41 52.41 74.03     -48.06
LABD NAV 0.38 -44.83 -44.83 -80.29     -51.63 5/28/2015 1.15 / 1.08
Market Price 0.10 -44.75 -44.75 -80.31     -51.61
SPSIBITR Benchmark Index -1.19 17.35 17.35 34.49          

* The Net Expense Ratio includes management fees, other operating expenses and Acquired Fund Fees and Expenses. If Acquired Fund Fees and Expenses were excluded, the Net Expense Ratio would be 0.95%. The Funds’ Adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with each Fund, under which Rafferty has contractually agreed to cap all or a portion of its management fee and/or reimburse each Fund for Other Expenses through September 1, 2018, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s daily net assets other than the following: taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses. If these expenses were included, the expense ratio would be higher.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com.

Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes. For additional information, see the fund’s prospectus.

Risks of the Direxion Daily Energy Bull and Bear 3X Shares – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Each Fund does not attempt to, and should not be expected to, provide returns which are three times the performance of their underlying index for periods other than a single day. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, Valuation Time Risk, risks specific to investment in securities in the Energy Sector, for the Direxion Daily Energy Bull 3X Shares, Daily Index Correlation/Tracking Risk and Other Investment Companies (including ETFs) Risk, and for the Direxion Daily Energy Bear 3X Shares, Daily Inverse Index Correlation/Tracking Risk and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

Risks of the Direxion Daily S&P Biotech Bull and Bear 3X Shares– An investment in each Fund involves risk, including the possible loss of principal. The Funds are non-diversified and include risks associated with concentration that results from the Funds’ investments in a particular industry, sector, or geography which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Each Fund does not attempt to, and should not be expected to, provide returns which are three times the performance of their underlying index for periods other than a single day. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, risks specific to investment in securities in the Biotechnology Industry and Healthcare Sector, for the Direxion Daily S&P Biotech Bull 3X Shares, Daily Index Correlation/Tracking Risk and Other Investment Companies (including ETFs) Risk, and for the Direxion Daily S&P Biotech Bear 3X Shares, Daily Inverse Index Correlation/Tracking Risk and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

Energy Select Sector Index (IXETR) – the index is provided by S&P Dow Jones Indices and includes domestic companies from the energy sector which includes the following industries: oil, gas and consumable fuels; and energy equipment and services. One cannot directly invest in an index.

S&P Biotechnology Select Industry Index (SPSIBITR) – The index is provided by Standard & Poor’s and includes domestic companies from the biotechnology industry. The Index is designed to measure the performance of the biotechnology sub-industry based on the Global Industry Classification Standards (GICS). One cannot directly invest in an index.