As Covid pandemic apparently subsides, many smaller biotech companies developing all sorts of vaccines and respiratory treatment medicines, formerly much favored by growth-focused investors, may soon completely drop out of their favor. Indeed, in most situations they have been developing just experimental drugs without much practical progress, while their balance sheets accumulated all sorts of liabilities and debts. Given the impact of SVB’s demise on the entire venture capital industry, it would be logical to expect quickly worsening conditions for many of those types of companies going forward.

So in our special focus is the SPDR S&P Biotech ETF (XBI), which may be in its early to mid-term underperformance, both relative to its large-cap peers and the broader U.S. stock market. Although the ETF allocates assets evenly among about 150 biotech stocks, the market capitalization of these stocks is much lower than that of the larger biotech stocks. The fund is seeking to track the performance of the S&P Biotechnology Select Industry Index. It generally invests substantially all, but at least 80%, of its total assets in the securities comprising the index. The index represents the biotechnology segment of the S&P Total Market Index (“S&P TMI”).

This has been a tailwind for XBI in more than a decade of extremely accommodative monetary conditions. However, all this has changed in 2022, with credit conditions now tightening. This presents a daunting set of challenges for a group of companies that, in many cases, as we mentioned above, are not yet profitable and may never be.

Since the beginning of 2021, XBI's relative and absolute price trends have been dwindling. Recently, however, things have continued to go for the worst. The ETF fell below that low earlier this month after trading in a perceived broad but consistent trading range of $75 to $95.

A minor break out of a 9-month-old trading range is not significant by itself. However, the decline in interest in small-cap biotech stocks from investors looking for relative stability against the backdrop of a weak economy leaves us with a growing (both fundamentally and technically) XBI’s trade-off between reward and risk. Hence, it’s worth to issue a warning and assign negative outlook to this biotech ETF.