China Biotech ETF Launches

August 15, 2018

Loncar Investments, along with Exchange Traded Concepts, is bringing to market today a new ETF that sets out to capture the growth in China’s emerging biopharmaceutical sector.

The Loncar China BioPharma Index ETF (CHNA) isn’t a one-of-a-kind strategy per se, but then again, it almost is. Brad Loncar, the biotech investor behind the $56 million Loncar Cancer Immunotherapy ETF (CNCR), says CHNA is coming to market right as China’s biotech sector is about to take off, and until now, ETF investors have had little access on that story.

CHNA lists on the Nasdaq stock market.

“Before today, there really wasn’t a meaningful biotech sector in China,” Loncar said. “Companies there focused primarily on manufacturing existing and generic drugs, with little focus on innovation and new product development. That’s changing quickly.”

Why? Because of four key trends pushing China’s biotech sector forward, according to Loncar:

  1. Until recently, the Hong Kong stock exchange had a rule that prevented companies that don’t earn revenue from listing. A lot of biotech companies don’t generate revenue because they are in R&D, so finding publicly traded biotech names was hard. That listing rule was changed earlier this year, and biotech IPOs have started popping up in Hong Kong.
  2. The Chinese government is pushing forward a program to modernize the country, known as “Made in China 2025,” which aims to accomplish several things, including increased investment in innovative sectors such as pharmaceuticals. Their goal is to make China biotech “world-class” in the next few years.
  3. China is currently reforming its version of the U.S. Food and Drug Administration, bringing it up to global standards.
  4. There’s a growing number of next-generation biotech companies being started in China by U.S.-experienced entrepreneurs, helping foster innovation in the sector.

“China biotech is transitioning from being a low-innovation, generic-based pharma sector to first-class drug developer,” Loncar added. “We’re at the very beginning of that, and excited to be ahead of the curve on this.”

Portfolio Makeup

CHNA will track a proprietary index comprising 28 Chinese biopharmaceutical companies listed either on Nasdaq or in Hong Kong.

Securities are organized in a modified market-cap weighting scheme that essentially looks like tiered equal weighting. It assigns slightly more weight to companies with a market cap of at least $10 billion; a little less weight to those somewhere between $1 billion and $10 billion, and even less to those under $1 billion.

Among the biggest holdings are companies like Sino Biopharm, WuXi Biologics and Shanghai Fosun Pharmaceutical, each at about 5% weighting. Six companies in the portfolio have market cap exceeding $10 billion; five are below $1 billion. It’s a diverse group.

The Competition

CHNA will join one other ETF in this segment, the KraneShares MSCI All China Health Care Index ETF (KURE).

Perhaps the main difference between these two funds is that they fish in slightly different ponds. KURE picks stocks listed in Hong Kong and in mainland China, while CHNA excludes mainland listings and includes Nasdaq-listed companies. That decision was deliberate, according to Loncar, who says the goal is to focus on companies with a global, outward focus rather than domestically focused names.

CHNA is also more heavily concentrated than KURE, which has 58 holdings. And it’s slightly cheaper, costing 0.79% in expense ratio versus KURE’s 0.82%.

KURE, which came to market in February this year, has $32 million in assets under management.

Contact Cinthia Murphy at [email protected]

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