A Guide to the NASDAQ Biotech Index

April 23, 2021 14:39 UTC

The biotech sector, the Biotech Index and stocks quoted in the index are some of the most exciting, volatile and potentially rewarding investment opportunities in the market.

Many Biotech Index firms are at the forefront of medical breakthroughs, especially in medical fields such as vaccine creation, a hot topic during the recent pandemic.

This article will discuss the following subjects to ensure you have a basic understanding of what’s involved if you are considering trading the index.

Suppose you are interested in trading the index, a stock or a biotech Exchange-Traded Fund (ETF). In that case, all the standard trading and investment rules apply, including doing your research, analysis (fundamental and technical) and homework.

What Is the Biotech Index?

The NASDAQ Biotechnology Index, often referred to as the NBI Index, is a market capitalisation-weighted index designed to reflect the performance of  all the biotechnology stocks listed on NASDAQ. Created and first traded on 1 November 1993, the index’s initial base value was 200.

The NASDAQ Biotechnology Index consists of NASDAQ-listed companies’ securities. The securities get classified according to the Industry Classification Benchmark as either the Biotechnology or the Pharmaceutical industry.

Biotech Index Data

  • The annual increase of the index in 2020 was 26.64%.
  • Yearly low 2,961 recorded on 16 March 2020
  • All-time high 5,427 recorded on 8 February 2021
  • The largest firm in the index is AMGN, at 8.04% of the index
  • The index is made up of 281 firms in the healthcare sector 
  • Each constituent firm must have a minimum market capitalisation of $200 million
  • Each firm in the index must have average daily trading of at least 100,000 shares.

What Is a Biotech Stock?

Biotech stocks are involved in three main medical-related areas: vaccine development, creating new drugs and researching new medical procedures.

Hundreds of billions of dollars get poured into these three areas. If the quoted firm has success in healthcare and disease treatment, the payoff can be extraordinary and the share price can rise significantly.

However, many failures make the biotech sector a risky bet for those who fail to do their research. The firms can have substantial cash burns at the outset, and the failure rate is incredibly high; there are no guarantees that a biotech firm will have their eureka moment and make a breakthrough.

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The Drug Approval Phases For a Medical Biotech Firm

In the United States, new drugs go through these three stages unless (as with COVID-19 vaccines) there’s emergency approval by the FDA (Food and Drug Administration) and phase three gets accelerated.

Phase 1. During this safety testing phase, which takes about a year, the product is tested on a small group of healthy individuals to see if the product is safe and what dosage is correct.

Phase 2. This efficacy phase, which can take between two to three years, is when the drug gets tested on a few hundred patients suffering from the ailment the drug is designed to cure. Any side effects or other factors which render administration of the drug inadvisable get recorded.

Phase 3. Clinical testing over another two to three years, which involves testing a few thousand patients suffering the ailment.

So, it can take six or seven years from research and the beginning of testing until a drug finally gets approved, and only then can the marketing and sales programme begin.

The three critical stages listed above also represent significant investor opportunities; stocks or sectors can experience upside breakouts when firms reach these milestones.

But to capitalise on the share price movements of the sector and individual stocks requires doing your homework and ensuring you keep your ear to the ground for any developments.

Many expert stock analysts suggest identifying a niche biotech sector that interests you and becoming immersed in its ups, downs, and developments, creating a watchlist and following the news and technical charting trends associated with a handful of biotech firms.

When trading the NASDAQ Biotech Index, it is advisable to remain alert and up to date with the biotech sector’s overall sentiment, which could improve if breakthroughs become publicised.

Why Is the Biotech Sector Popular?

The positive expectancy of biotech firms due to the COVID-19 virus undoubtedly caused increased speculation and trading activity during 2020 and 2021. Investors who previously shunned the sector and index were attracted to the news of breakthroughs and the upside potential.

Biotech shares were in vogue during 2020 and 2021 as pharma firms such as Moderna, Pfizer, Johnson & Johnson and AstraZeneca became household names due to the COVID-19 pandemic and their efforts in creating a vaccine.

The companies’ expertise in developing vaccines created intensive speculation in any stocks labelled as “biotech” quoted on various global markets.

A cursory glance at one stock, Moderna (MRNA), reveals investors’ appetite for speculation in the sector and how Moderna’s stock price performance ebbed and flowed during twelve months from March 2020 to February 2021.

Depicted: Admirals MetaTrader 5 - Moderna Inc. Daily Chart. Date Range: 12 February 2020 - 20 April 2021. Date Captured 20 April 2021. Past performance is not necessarily an indication of future performance.

On 13 March 2020, the stock traded at $21.30. The price reached an all-time high of $185.98 on 8 February 2021, as the USA began to use their COVID-19 vaccine as part of a mass inoculation programme. On 3 March 2021, the share price fell 8.43% as a broader sell-off gripped the NASDAQ index.

Moderna is a company that, before it developed the vaccine for COVID-19, had not brought a successful drug to market since its foundation in 2010.

How Do I Trade the Biotech Index?

When you trade an index instead of individual stocks, you are looking to buy and sell based on a sector and market’s overall sentiment, and you don’t concentrate on the performance of specific stocks in the index.

Your focus is on the price movement in the index. The method and strategy you’ve developed to trade another index could be applied. Like the NASDAQ index, the Biotech Index can be bullish as other indices such as the S&P 500 and Dow Jones can be bearish.

The indices don’t necessarily trade in correlated movements or contrarian, but optimism might exist in the biomedical sector while negative sentiment is prominent in the more dominant markets.

How to Trade Stock Index CFDs With Admirals

With Admirals, you can trade Contracts For Difference (CFDs) on many of the world’s most popular stock market indices as well as numerous other financial instruments! CFDs allow traders to speculate on both rising and falling markets, whilst benefiting from access leverage.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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