Are HealthShares ETFs Too Specialized?

The XShares family of health exchange-traded funds have both strong supporters and equally sharp critics. It comes down to this question; are they too focused and specialized for the average investor? So far there are nine HealthShares on the market including: metabolic-endocrine disorders (HHM); autoimmune-inflammation; cancer; cardiology; gender health; respiratory/pulmonary; neuroscience: and ophthalmology. Each has a portfolio of between 20 and 25 stocks, mostly in relatively small companies. The median market value of companies in most of the ETFs is less than $2bn.

Instead of the usual market cap weighting of companies in the ETF basket, the companies start with an equal weighting and will be rebalanced regularly. John Authers of the Financial Times walks through the logic of the Healthshares and cites some of the impressive numbers that suggest that XShares and its backers may well have found a product for which there will be a demand. But he cautions that private investors without specialized knowledge, however, should almost certainly avoid them except in small dosages. Perhaps investors should be required to get a prescription for HealthShares from their financial advisors. These ETFs can make you a lot of money in a short time but use with care and consider them as venture capital.

Comments

[Alan Brochs...:]

When I first learned of the HealthShares concept, I was rather excited. I had always found that there were very few healthcare funds that invested in smaller companies (the few that do are actively managed). Any sort of passive vehicle was heavily weighted by Big Pharma, as are most of the actively managed ones.

Well, these guys have gone WAY too far. This is far too specialized. Any investors in these funds had better be prepared to be long-term holders, as the liquidity will probably never be very good. Perhaps going as a mutual fund might have made more sense.

2007 May 09 10:25 AM