This analysis is by Bloomberg Intelligence senior analysts Eric Balchunas and Athanasios Psarofagis. It appeared first on the Bloomberg Terminal.
The hunt for a COVID-19 vaccine is fueling early gains for a new theme exchange-traded fund, GERM, which has higher allocations to companies such as Inovio, Novavax and Moderna than any other ETF. A similar-sounding ETF isn’t getting the same boost, highlighting the importance of due diligence in the increasingly popular thematic category.
GERM’s all-in design pays off immediately
The ETFMG Treatments Testing and Advancements ETF (GERM) was up 13% in its first two weeks, offering a reminder of how crucial index design is for theme ETFs. GERM is highly focused, going all-in on biotech names that aim to treat and prevent viruses, including some companies pursuing a COVID-19 vaccine. Inovio and Novavax are responsible for about half of the ETF’s gain. No ETF has a bigger weighting to either company.
The early performance highlights the difference between a “pure-play” thematic ETF such as GERM and the broader approach of another new launch, the Pacer Biothreat ETF (VIRS). The latter includes only large-cap stocks — many of which aren’t involved in vaccine development.
Biggest contributors to GERM’s start
Netflix in biothreat ETF a pitch to advisers
The Pacer Bio Threat ETF (VIRS), despite the name, is much broader than GERM, with mainstream holdings such as Wal-Mart, Amazon.com, Netflix and Lowe’s, alongside more targeted stocks, including Abbott Laboratories and Sanofi, a maker of hydroxychloroquine. The portfolio may be overly broad for the theme, in our view, but the ETF is likely targeted at advisers. They tend to prefer ETFs stuffed with big-cap stocks, so the fund moves much like the market, avoiding the need to explain potential performance gaps to clients.
GERM has much more small-cap exposure and tracking error to the S&P 500 Index.
Top 10 holdings of VIRS includes big-cap beta
Thematic ETFs boosted by gaming, cloud demand during lockdowns
Thematic exchange-traded funds are benefiting from COVID-19 lockdowns, with funds tracking gaming, cloud-computing and internet services leading the category to its third-best month of inflows in April. We believe growth will be sustained as issuers accelerate launches to take advantage of the ETFs’ higher fees.
Staying home brings ETF cash in the door
U.S.-listed thematic ETFs, led by gaming, cloud-computing and internet-related funds, are growing rapidly this year, aided by relatively strong performance as stay-at-home orders and remote working in response to the COVID-19 pandemic fuel demand for tech companies’ products and services. April’s $1.6 billion in thematic inflows was the third-highest monthly total on record. European funds also saw a surge in assets.
Broad performance among best of sectors
The pickup in thematic ETFs’ inflows may stem from resilient performance. We identified 400 non-leveraged sector and thematic funds with at least one-year track records and ranked the percentage gaps from their 52-week highs. Thirty-nine thematic funds, or 34% of the group, were in the top quartile, putting them closest to the peaks. Health care and technology had the highest percentage of funds in the top quartile, at 86% and 53%. Energy, financials, utilities and real estate had none.
% From 52-week high (top quartile)
Leapfrogging industry ETFs in assets
Thematic funds typically don’t fit easily within existing sector categories, as they usually fail to conform to company classification systems, such as the Global Industry Classification Standard (GICS). Considered separately, thematic ETFs have grown steadily to become larger than all but three traditional ETF sectors, with $48 billion in assets. At current rates, we expect the thematic category to overtake No. 3 real estate.
Technology and health care are the largest sector-ETF categories. Technology holds $198 billion of the group’s $550 billion total.