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Obesity and Weight-Loss Drugs: A New Thematic ETF Segment?

Published 2024-04-18, 10:12 a/m

Within the healthcare sector, investors have traditionally had the option to focus on specific GICS industries like medical equipment, healthcare services, biotechnology, and pharmaceuticals.

However, aside from well-defined categories, there's been room for thematic growth, such as genomics, though this area hasn't seen as much development as others.

Recently, there's been an interest in a particular segment of healthcare: weight-loss drugs, specifically glucagon-like peptide-1 (GLP-1) agonists, including popular names like Ozempic, Mounjary, and Wegovy. These drugs function by mimicking a hormone that targets areas of the brain involved in appetite regulation, thereby reducing hunger and causing weight loss.

Many of these drugs are produced by publicly traded healthcare companies like Novo Nordisk (CSE:NOVOb), Eli Lilly (NYSE:LLY), and Viking Therapeutics. The trend has even reached retailers like Costco (NASDAQ:COST), which recently launched a $179 weight-loss program in partnership with healthcare provider Sesame, potentially offering access to Ozempic.

The demand for these products is organic – according to The Lancet, there are an estimated 1 billion individuals living with obesity (BMI > 30) and estimates predict this could rise to 1.9 billion by 2035. Currently, less than 2% of obesity cases globally are treated by weight loss drugs, according to Novo Nordisk.

This shift in focus has not gone unnoticed by ETF issuers, who are now looking to capitalize on the trend by launching or filing for ETFs that concentrate on the obesity and weight-loss drug market.

As thematic segments gain more attention, here's an overview of the ETFs currently available and those that might soon enter the market, showcasing the evolving landscape of healthcare investment opportunities.

Which ETFs are available right now?

As of April 3, 2024, the Tema Obesity & Cardiometabolic ETF (HRTS-0.73%) stands out as the first and only obesity and weight-loss-focused thematic ETF available for trading on U.S. markets.

"HRTS is the first and only weight loss drug ETF, which has reached $60 million in 16 weeks on the back of top performance," says Maurits Pot, CEO of Tema ETFs. "HRTS is managed by a 25-year biotech veteran investor, Dr David Song, MD, PhD, CFA - a trained Yale doctor with a 25-year healthcare investment track record at top firms like Rockefeller and Balyasny."

So far, HRTS has accumulated $60 million in assets under management (AUM) and boasts a portfolio with a total of 45 holdings. Importantly, it is also actively managed.

"Biotech investing carries significant downside risks which necessitate specialized expertise and an active approach," Pot says. "Passive approaches, especially those that are concentrated, have repeatedly disappointed investors - this exacerbated by the pace of weight loss drug innovation looking beyond GLP-1 with, by some estimates, 300+ different trials in the clinic."

Among its top holdings are notable companies like Vertex Pharmaceuticals (NASDAQ:VRTX), Eli Lilly, Novo Nordisk, and Amgen (NASDAQ:AMGN), all of which play significant roles in the healthcare sector, particularly in the development and distribution of weight-loss drugs and treatments for cardiometabolic disorders.

In particular, Pot highlights Viking Therapeutics as a mid-cap standout performer in HRTS. "The stock is up +620% as they have shown very competitive Phase I and II data across their obesity franchise and are likely a takeout target," Pot says.

On the flip side, Pot also believes giants like Novo Nordisk also have a significant runway with their current pipeline. "This bellwether company is on the cusp of evergreening its obesity franchise beyond Ozempic/Wegovy through new innovation (drugs like Amycretin, Cagri-Sema) which could see it drive towards a $1 trillion valuation," he says.

Finally, Pot foresees strong growth catalyst ahead for this up-and-coming healthcare niche. "There is immense interest in the space from M&A, and innovation to address better efficacy, more tolerability (GLP-1s can cause severe side effects), and supply constraints," he says. "The industry is already exploring non-GLP1 drug avenues, including new oral solutions."

Since its market debut on November 20, 2023, HRTS has seen a substantial price increase of 22.91%, excluding distributions. The ETF charges a net expense ratio of 0.75%.

Which ETFs are pending?

Following the launch of Tema's pioneering obesity and weight-loss-focused ETF, other issuers are looking to enter the scene with their thematic ETFs, as evidenced by recent filings.

The Roundhill GLP-1 & Weight Loss ETF, ticker "OZEM", is poised to join the market as another actively managed ETF. Roundhill plans to leverage its research capabilities to select companies heavily involved in the weight-loss pharmaceutical sector.

This includes firms that either derive a significant portion of their revenue from these products, possess substantial assets within this space, or are acknowledged leaders in the development and sales of weight-loss drugs.

OZEM's inclusion and rebalancing criteria will revolve around a proprietary keyword screen for terms associated with obesity and weight loss, with quarterly reviews ensuring the portfolio remains relevant and balanced. Holdings will be determined based on thematic relevance and keyword frequency.

Additionally, the Amplify Weight Loss Drug & Treatment ETF is set to offer a passively managed alternative, tracking an index devised by VettaFi.

This index will feature global companies categorized as either "Drug Manufacturers" or "Enablers," focusing on those involved with GLP-1 agonist drugs—either marketed products or those undergoing FDA clinical trials—and companies that provide outsourced development, manufacturing, and support services for these drugs.

The index allocates 70% to Drug Manufacturers and the remaining 30% to Enablers, with specific weighting caps to ensure diversification and balance.

Companies in the Drug Manufacturer segment that are at the commercial stage or in phase 3 trials are capped at 15%, while those in earlier stages are limited to a 5% weighting. Enablers are capped at 5%.

This content was originally published by our partners at ETF Central.

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