GERM ETF: A New Player In The Infectious Disease Segment

Summary

• ETF Managers Trust - ETFMG Treatments Testing and Advancements ETF is a biotech focused ETF invested in treatments and therapies firms.
• ETF Managers Trust - ETFMG Treatments Testing and Advancements ETF is a new fund with only a year behind it.
• The fund has shown strong growth since its inception.
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ETF Managers Trust - ETFMG Treatments Testing and Advancements ETF (NYSEARCA:GERM) is an exchange traded fund with focus on the biotech sector. It specifically targets companies which are dealing in research and development of therapies, testing technologies and vaccines. The fund tracks the composition and performance of the Prime Treatments, Testing and Advancements Index. ETFMG Treatments Testing and Advancements ETF is a new player in the field as the fund was started only a little more than a year back in June, 2020. However, it has shown robust performance so far.

The Underlying Index and Composition

ETF Managers Trust - ETFMG Treatments Testing and Advancements ETF is based upon the Prime Treatments, Testing and Advancements Index, which is managed by Level ETF Ventures. The index aims to provide its investors with exposure to domestic companies engaged in the field of infectious diseases and their treatments. The index and consequently the fund is focused on “Treatments, Testing and Advancement Companies” i.e. companies which are engaged in the development and commercialization of vaccines, biological testing or treatments for infectious diseases. The segment is full of potential as the world struggles with newer variants of infections.

While the fund is narrowly focused on a very specific segment, it also brings about diversification to the portfolio by investing in different silos. As on June 30, 2021, the fund’s 28.57 percent of the corpus is invested in Testing segment, while 71.43 percent goes to Treatments segment.

Essentially, infectious diseases are managed with a three-pronged strategy consisting of vaccines, therapies and testing. According to a report released by Grand View Research Inc., the global vaccine market is expected to surpass $77.5 billion valuation by 2024, providing 10.3 percent CAGR. Therapies are generally used to mitigate the chances of severe outcomes of infectious diseases.

Biotech sector experienced significant upheaval on account of the Covid-19 outbreak. However, the sector bounced back as companies churned out new tests, therapies and vaccines. The impact of the resurgence was evident as stocks resumed their rally.

Apart from the sectoral fund, the performance of individual firms also impacts the performance of the fund. Moderna, one of the most prominent holdings of the fund, is a front runner in the treatment segment. The company with its covid-induced buoyancy was able to provide value-added products and services during the pandemic. The jump in its stock price helped propel the fund up.

Another major component of the fund is Gilead which is a therapy segment leader. The company’s Remdesivir was used globally for fighting the pandemic. The company proved to be another blockbuster for the fund. On the testing front, the fund included some high performers such as Quidel. The following table shows the largest holdings for the fund as on October 2, 2021.

Source: Company Website

The fund is invested in growth-oriented stable companies, which mitigates the risk profile of the portfolio. The stability of the constituent firms is essential for the steady performance of the fund.

The Performance

While GERM is a passive fund, which implies that it mimics the actions of the underlying index and only transacts when there is change in the index composition, there are still metrics, which may be used for analyzing the performance of the fund. ETFMG Treatments Testing and Advancements ETF is a new index and has only completed a year. However, the performance so far has been pretty impressive.

The two metrics which are generally used for gauging the performance of an ETF are the growth rate for its NAV and the growth rate for its Market Value. Generally, both the metrics work in tandem. However, at any given point, there may be differences between them. Such gap may be used for determining entry and exit points. ETF Managers Trust - ETFMG Treatments Testing and Advancements ETF has given 41.67 percent growth in its Market Price in the past one year, while its NAV grew 42.17 percent during the same time. The fund mildly outperformed its underlying index, which returned 41.31 percent growth.

Investment Thesis

ETF Managers Trust - ETFMG Treatments Testing and Advancements ETF is a sector focused fund as it only invests in healthcare stocks. These funds are useful as they can provide investors exposure to a particular segment without them having to pick individual stocks. ETFs are a good addition to any market-based portfolio for several reasons. Apart from doing away with the hassle of picking individual stocks, these ETFs also provide liquidity benefits. Unlike mutual funds, these funds may be bought or sold any time the market is open. This ensures that investors are able to manage their holdings in a prompt manner.

Further, passively managed funds incur low operating and trading costs too. This happens because the funds replicate the underlying index and transact only when there is a change in the index. For ETF Managers Trust - ETFMG Treatments Testing and Advancements ETF, the expense ratio has been given at 0.68 percent, which is marginally lower than industry standards, making it an efficient ETF.

The overall global market for infectious disease treatments is expected to grow by the CAGR of 8.9 percent and will likely touch $99 billion valuation by 2022. As a sector focused ETF, ETFMG Treatments Testing and Advancements may provide robust returns to the investors. However, there are certain risks attached with such ETFs as well. Their focus on a particular sector makes them susceptible to the tremors in that segment. Further, these ETFs also have low diversification, which may impact their final performance.

ETF Managers Trust - ETFMG Treatments Testing and Advancements ETF is a new fund with only a little more than a year worth of track record. However, it has provided robust returns and has strong selection of portfolio companies. Overall, the ETF may be recommended to investors with long term investors. The ETF is particularly good for providing sectoral balance to a portfolio with other sector focused ETFs in it.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.