The ETFMG Treatments, Testing and Advancements ETF (GERM) is a new ETF launched mid-June and already on a run. I take a look at some of the holdings of the ETF and note some issues those holding the ETF may face. Notably given the current COVID-19 pandemic, the ETF offers broad exposure in a single product to a range of biotechs who stand to benefit from COVID-19.
What’s in the ETF
GERM’s holdings include a range of biotechs focused both developing testing and treatments for infectious diseases.
GERM is designed to give direct exposure to the biotech companies directly engaged in the testing and treatments of infectious diseases. Focused on advancements with targeted exposure to the forefront of R&D, vaccines, therapies and testing technologies. – About GERM.
The ETF is designed to provide returns, or losses, that before fees and expenses would correspond to that of the Prime Treatments, Testing and Advancements Index. Unsurprisingly then, the holdings of the ETF mimic the holdings of the index.
Figure 1: Comparison of holdings greater making up greater than 1 percent of weighting in the Prime Treatments, Testing and Advancements Index (left panel) and the GERM ETF (right panel). Source: Prime Indexes website and GERM ETF website.
Since the GERM ETF only launched in mid-June, we can get a better idea about what the historical performance of GERM might have been, had it been around longer, by looking at the historical performance of the index.
Figure 2: Historical performance of the Prime Treatments, Testing and Advancements Index. Source: Fact Sheet on Prime Indexes website.
Certainly COVID-19 has helped many of the names in this ETF. For example, looking at the top five holdings, Inovio Pharmaceuticals (INO), Novavax (NVAX) and Moderna (MRNA) are all developing COVID-19 vaccines. Alnylam Pharmaceuticals (ALNY) is developing an RNAi based treatment for COVID-19 that might also be used to prevent COVID-19, and Bio-Rad Laboratories (BIO) markets tests for SARS-CoV-2.
Some potential issues
Right now stocks with COVID-19 exposure, exposure in terms of having something to offer to combat the pandemic, tend to trade at a premium. The COVID-19 space within biotech is in a bit of a bubble. It seems just about every other company is rushing to make a vaccine or a treatment and unfortunately it is not likely they will all work, and if they did they would have to share the market between themselves. STAT’s Adam Feuerstein has summed the sentiment perfectly, jokingly suggesting he will be calling these biotechs in a year to enquire, “So, how’s that Covid-19 drug coming along?” I believe as such that the GERM ETF could be a better long now while there is lots of hope built in to many of the names in the ETF, rather than 12-18 months from now when the winners (likely few) and losers (likely many) have been worked out.
“Most vaccine projects fail-it’s very difficult to make a vaccine,” Perlmutter says. “So if I’m going to start making a vaccine, I’d like to be thoughtful about which vaccine platforms have the greatest likelihood of success.” – President of Merck Research Laboratories, Roger Perlmutter, as quoted in Science.
What might the GERM ETF look like then in 12-18 months or beyond? It does depend where the COVID-19 pandemic ends up, how many waves there are and if initial efforts to develop vaccines are indeed successful. However we can take an example from something like the ETFMG Alternative Harvest ETF (MJ), that index contains a lot of pot stocks, names that traded up throughout 2018 and again in early 2019. Eventually the pot stock space wasn’t the hot space anymore, reality kicked in, the Canadian market wasn’t as big as expected and most names ended up as losers. The MJ ETF entered a prolonged decline as a result and it wasn’t saved by the non-pot stock holdings in that ETF (including Big Tobacco names like Altria Group (MO)).
Figure 3: Past three years of MJ trading.
If Johnson & Johnson (JNJ) or Merck (MRK) are successful in developing a vaccine, and names like INO, NVAX and MRNA fall short, then GERM is probably set to sell off. Taking a closer look at the holdings of GERM, we see many of the big names are part of the index, but none comprise more than 1% of the holdings of GERM. The gains seen if MRK or JNJ succeeds in developing a vaccine won’t offset the drop we might see in other names like INO, NVAX or MRNA. I am assuming that success for one name might mean a drop in the others, but it certainly means at the very least the market would have to be shared.
Table 1: A selection of Big Pharma names found in the GERM ETF as of June 30, the right column denotes the weighting of that name in the ETF. The definition of Big Pharma isn’t strict, I included Regeneron Pharmaceuticals (REGN) even though it is more like big market cap, than Big Pharma.
|LLY||LILLY ELI & CO||0.71%|
|GILD||GILEAD SCIENCES INC||0.63%|
|JNJ||JOHNSON & JOHNSON||0.62%|
|BMY||BRISTOL-MYERS SQUIBB CO||0.61%|
|MRK||MERCK & CO. INC||0.60%|
Initial results from early/mid-stage trials of vaccines from Big Pharma players prior to the 12-18 month time frame, perhaps in the next 6-9 months, might also signal that Big Pharma has this one covered. Again in that scenario, GERM might not be the ideal name to be holding.
The GERM ETF does offer broad exposure to biotechs developing drugs for infectious diseases, but although there are more diseases than COVID-19, the trading of the ETF is likely to be heavily influenced by how drug development for COVID-19 progresses. I do see GERM as a potential hedge if the broader market sells off on a second wave of COVID-19, but I’m skeptical about suggesting it as a long-term, buy-and-hold name.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any 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.