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According to the Centers for Disease Control (CDC), approximately 42% of people in the U.S. are afflicted with obesity, and 9.2% of the population meet the criteria for severe obesity. Therefore, it's no surprise why Goldman Sachs Research isn't alone in estimating that by 2030, the market for weight loss drugs will reach a size of around $100 billion. Such a vast market will doubtlessly support many competitors. The myriad comorbidities of obesity, including type 2 diabetes and cardiovascular disease in particular, guarantee the presence of many different medical niches to be served with specialized therapies. And that's before even getting into the massive swath of the market that's likely to be servable with generalist weight loss drugs.
Investors are doubtlessly already familiar with the weight loss market's leaders as of today, specifically Novo Nordisk, (NYSE: NVO) and Eli Lilly, (NYSE: LLY) which make wildly in-demand products like Wegovy and Zepbound. But there's little reason to believe that these players will be the only ones worth investing in as the market matures over the coming years. At the same time, non-specialized investors are likely to struggle with identifying all of the different biopharma businesses that are aiming to compete in the space, never mind sifting through them in detail to find the winners.
And that's where the Tema Obesity & Cardiometabolic ETF (NASDAQ: NASDAQ:HRTS) could be a useful tool. In short, the ETF is a non-diversified play that grants exposure to the leading biotech and pharma companies that aim to compete in the anti-obesity market, as well as the broader cardiometabolic space, which also includes fields like diabetes treatments and devices. Today, at the start of the obesity market's period of rapid expansion, an investment in this ETF is likely to be favorable, so let's analyze in detail what it sets out to do and how effective it could be.
Fund Overview and Investment Strategy
With just over $75 million in net assets and $44 million in implied liquidity, HRTS is on the smaller side for an ETF. Initiated in late November 2023 and issued by Tema Global Limited, there hasn't been much time for it to experience a large run-up in value. Nonetheless, in the period since its inception, HRTS has outperformed the market, rising by roughly 33% versus the market's growth of nearly 25%. Its net expense ratio is 0.75%, which is comparable to other actively managed ETFs, but certainly significantly higher than the norm among passive or index strategies, which may be a consideration for fee-averse investors. Its gross expense ratio is 0.99%.
As the fund's name implies, its mandate is to invest in developers of weight loss medicines. But, it actually has a narrower focus within that segment: Developers of GLP-1 drugs. Per its summary prospectus, a minimum of 80% of the fund's net assets are to be allocated in companies that generate 50% or more of their sales from GLP-1 therapies or adjacent products or services.
For the uninitiated, glucagon-like peptide 1 (GLP-1) is the single most popular therapeutic target in the weight loss space today, both for marketed drugs, and for candidates in development. The receptor is present in many different organs and tissues, and it's implicated in many different functions that are relevant for treating obesity, ranging from blood sugar control to feelings of satiety and beyond. In 2024, the state of the scientific understanding of GLP-1 and its associated metabolic pathways indicates that it has far more promise as a target for interventions intended to treat chronic illnesses such as obesity or type 2 diabetes rather than acute ones. That paradigm may ultimately change or become more nuanced, but for now, the vast chronic illness markets that are within reach for GLP-1 drugs are the main reason why pharma companies are interested in pursuing further development.
While many programs, including successful ones like Eli Lilly's Zepbound, ultimately target other receptors in addition to GLP-1 in hopes of achieving a superior therapeutic effect, the state of the market today is thus that of a gold rush for GLP-1 candidates specifically. So the takeaway here is that buying the ETF is equivalent to betting that there will continue to be an influx of highly profitable GLP-1 medicines to treat chronic diseases. The underlying assumption is something that's practically a given at this point.
Another implication is that as the scientific characterization of these drugs and their downstream effects becomes more detailed, the total size of the market will increase, which will then increase the addressable market for at least some of the existing competitors. Much of that scientific process will occur without them needing to spend anything on research and development (R&D). Therefore, a key tailwind for the ETF is the forward march of the related scientific research -- research that is being conducted at a higher and higher volume today, independent of any one company's pipeline.
Take a look at this chart depicting the pace of GLP-1-related research so far:
Chart compiled by author. Data from PubMed.
As a larger and larger population of people take GLP-1-targeted drugs, research interest is more likely to increase than decrease from here. And that supports the bull case for HRTS as well.
Fund Composition and Key Holdings
HRTS aims to hold shares of more than 15 businesses, but fewer than 100, and it presently holds 45. Furthermore, the minimum market cap for inclusion in the fund is $100 million; the median market cap of a company in the fund is around $4.7 billion. Therefore, it's best understood as a collection of mid-cap pharma businesses with a few smaller biotechs thrown in.
Observe this slide describing the nature of the ETF's mix of investments:
HRTS investor presentation.
As you can see, the vast majority of the fund's holdings are in biopharma, with a minority in medtech. Thus, there is significantly implied exposure to the R&D risk of the companies, as they may fail to develop and market new medicines. But, that risk is mitigated by the fact that these established players have multiple segments to rely on for growth among their commercialized medicines. One key risk that is not mitigated in any way, however, is the high probability of fighting for market share between the businesses held, especially the larger ones. While that isn't a big consideration for the near term, as the market for weight loss medicines is nowhere near being saturated relative to demand, in the long run it may make it harder for the fund to gain value unless its strategy adapts accordingly.
Similarly, of the technologies utilized by the fund's holdings, biologics and small molecule medicines are the most common, whereas riskier and unproven interventions in the context of treating obesity, like RNA-based approaches or gene therapies, are not as well-represented. Therefore, the risk profile of this ETF only rates as moderate despite its exposure to outsized growth. If in the future those riskier modalities deliver effective therapies, it'll be another tailwind for growth.
HRTS' largest holdings are a grab bag of major GLP-1 players, as well as leading competitors in the diabetes space. Here are its top 10 holdings by weight:
HRTS investor presentation.
Notable holdings that aren't listed in that table include rising stars in the cardiometabolic space like Viking Pharmaceuticals (NASDAQ: VKTX) and Madrigal Pharmaceuticals (NASDAQ: MDGL) as well as companies like Structure Therapeutics (NASDAQ: GPCR). Investors should be aware that the fund doesn't necessarily buy any biopharma that's developing a GLP-1-targeted medicine, however. So don't expect it to offer exposure to Pfizer's (NYSE: PFE) weight loss program just because it's dabbling with a GLP-1 program or two.
Performance Drivers And Risks
There are two main factors that will continue to drive outperformance of this ETF in the next few years relative to the market. The first is the white-hot demand and rapidly growing sales of the GLP-1-targeted medicines produced by Eli Lilly and Novo Nordisk. As those players scale up their manufacturing capabilities, they can serve even more demand, growing their top lines further and driving their shares up in the process.
This is supported by the fund's most recent performance data from Q2:
HRTS investor materials.
The second factor is that the smaller holdings, typically biotechs, can experience significant share price appreciation as they release positive clinical trial data pertaining to the safety and effectiveness of their GLP-1-related candidates. As more and more high-quality clinical data on the GLP-1 medicines as a class is published, it may also increase the success rate of other clinical investigations. This effect also holds for the larger biopharmas, but it's attenuated due to their size and the existence of their many other products and segments. As mentioned previously, it is possible for clinical data catalysts to be negative for the biotechs held in the fund. Ideally, the fact that the biotechs are weighted less will likely prevent those worse-than-expected results from having a significantly detrimental impact on the value of the ETF.
Though it is improbable to occur in its worst possible form, there is a major risk associated with this ETF. Medicines that intentionally interact with GLP-1 are still very new. While there isn't presently reason to believe there are large and totally undiscovered health risks associated with treatment, such risks may exist. There may be problems like new side effects, or an increased risk burden for experiencing other conditions, which are only revealed after the drugs have been on the market for many years. Likewise, there may be health impacts associated with being treated for long periods of time that are not presently understood by medicine.
If such consequences are proven true by future investigations, it could be catastrophic for the value of this fund. The extent of the damage will be determined in large part by the severity of any newly uncovered health risks and whether the problems pertain only to specific medicines, or to the entire group. Investors holding this ETF should periodically be on the lookout for signs of trouble, even if it is not likely to occur. Given what is known today, the probability of an issue with just one product is higher than the risk of there being an issue with the class of drugs as a whole.
Peer Comparison
There are a couple of ETFs with focuses that are similar to HRTS, including the Roundhill GLP-1 & Weight Loss ETF (NASDAQ: OZEM) and the Amplify Weight Loss Drug & Treatment ETF (NYSEMKT: THNR).
Here's how they compare to HRTS:
Ticker | Net Assets | Net Expense Ratio | Strategy | Inception | Weighting of Eli Lilly and Novo Nordisk as a percentage of total assets |
HRTS | $75 million | 0.75% | Active management | November 2023 | 11.4% |
OZEM | $33 million | 0.59% | Active management | 44.4% | |
THNR | $3.1 million | 0.59% | Tracks the VettaFi Weight Loss Drug & Treatment Index | 30.1% |
The holdings are somewhat overlapping between all three funds, which is to be expected. But, HRTS features much smaller weightings of Eli Lilly and Novo Nordisk compared to the other two funds, which is significant because all three feature, those two stocks in their top 10 holdings by weight. Plus, HRTS has much more exposure to the medical devices segment.
In total, OZEM and THNR are very concentrated in the top two companies currently competing in the cardiometabolic drugs market today. That grants them less exposure to upside from potentially high-growth biotech stocks compared to HRTS. Furthermore, the expense ratios of OZEM and THNR are on the high side, as investors could easily replicate much of the performance of those funds by buying the four or five largest holdings directly, which would not be sufficient to replicate the performance of HRTS. Therefore, Tema's ETF is the best option among its immediate peers right now. It is likely that there will be more funds with the same concept launched over the coming quarters.
Conclusions
The HRTS ETF is a quick and easy way for investors to get exposure to the cardiometabolic space, especially the much-hyped GLP-1 drugs segment. As the market expands, it is very probable that this fund will appreciate in price. While there may be unknown unknowns pertaining to the possibility of negative health impacts of these medicines, on the whole, the regulatory review process is reliable enough that the financial risk to investors in the ETF is acceptable.
