(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 (NASDAQ:GILD). -- 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 (NASDAQ:NDAQ) 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.