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2 Reasons Why the iShares NASDAQ Biotechnology Index (ETF) Tumbled 11% in October

By Sean Williams – Nov 7, 2016 at 1:17PM

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Earnings flops and election uncertainty weighed on the most widely followed biotech ETF.

Image source: Getty Images.

What happened

Shares of the iShares NASDAQ Biotechnology Index (IBB -0.47%), a comprehensive and widely followed electronic-traded fund (ETF) that tracks the performance of the largest biotech companies, tumbled 11% in October according to data from S&P Global Market Intelligence. There are two likely reasons for the poor performance.

So what

For starters, some of the index's largest holdings moved notably lower after reporting their third-quarter earnings results. As an example, Amgen (AMGN 0.20%), which makes up 7.4% of the weight of the fund, dove following its third-quarter results. Amgen noted in its quarterly report that its pricing power on lead drug Enbrel has nearly disappeared, which caused some analysts to predict that growth rates for Amgen could slow dramatically throughout the remainder of the decade. Likewise, Illumina, which comprises 3.64% of the respective weighting of the ETF, also struggled badly after earnings. 

The other major issue for the iShares NASDAQ Biotechnology Index is election uncertainty. Regardless of whether Hillary Clinton or Donald Trump heads into the Oval Office, both candidates agree that prescription drug inflation is currently too high. Trump has suggested allowing consumers to shop for prescriptions medicines outside the United States, while Clinton has proposed clamping down on out-of-pocket spending for consumers on a monthly basis, as well as shortening the patent-protection period to encourage the entrance of generic drugs.

It's impossible to tell whether or not any of these proposals will gain traction in Congress, but the clear takeaway is that prescription-drug reform may not be swept under the rug in the next administration.

Image source: Getty Images.

Now what

This has been a rough year for biotech investors, but it's important to put the bigger picture in context. Since entering a bull market in 2009, biotech stocks have been among the top performers -- and as we all know, nothing goes up in a straight line.

The rapid decline that biotech stocks underwent in October appears to have created an attractive buying opportunity. A quick scan of some of the market's largest biotech companies shows that many are trading at single-digit forward P/Es, or below a PEG of 1 (a level considered to be fundamentally cheap).

For example, Celgene (CELG) is still trading at a PEG that's well below 1 after topping its Q3 earnings view and upping its full-year forecast. Gilead Sciences (GILD 0.20%) is down to a forward P/E of just 6 after slightly missing Wall Street's Q3 profit forecast. Even Amgen's forward P/E has dipped below 11, which is highly attractive given that its operating margins are now safely above 50%.

Investors looking for a good way to gain exposure to the biotech sector without risking their money in a single stock should consider giving the iShares NASDAQ Biotechnology Index a closer look following its October swoon.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of and recommends Celgene, Gilead Sciences, and Illumina. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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