Cancer ETF Redefines Biotech Investing

February 08, 2016

There’s a new ETF in the market that sets out to reinvent biotech investing, one theme at a time. The Loncar Cancer Immunotherapy ETF (CNCR) is the first ETF to cover cancer treatment specifically by tracking an index developed by Brad Loncar, head of Loncar Investments and a longtime biotechnology investor.

We caught up with Loncar to talk about why this strategy makes sense, and why it’s a needed take on the biotech segment.

ETF.com: You just launched CNCR. What’s behind the idea of investing so specifically in a cancer-treatment-centered ETF?

Brad Loncar: There were two ideas behind it. First, there are a handful of biotech indices and ETFs in the market today, but they're all very broad, and very undifferentiated. As an investor, I remember 20 years ago thinking the same thing about technology.

If you wanted exposure to technology, you would buy the “Q’s” and feel like you owned technology. You don't think of technology that way anymore; you think of its individual components, like cybersecurity and semiconductors and telecom equipment. And all of those segments have different business models—some are high growth, some are low growth. They're valued differently by investors.

The reality of biotech is the same. Biotech is not one thing. There are high growth areas of biotech. And there're innovative areas of biotech. And there's the opposite, too. As a biotech investor, I noticed that there weren't products that made that distinction.

I wanted to look at the most innovative, high-growth, game-changing area within biotech and view that as an investment theme. To me, that’s cancer immunotherapy; it’s using your own immune system to fight cancer.

There are a handful of drugs that are on the market now that big companies like Bristol-Myers and Merck have approved and are starting to sell. And then there's this whole groundswell of immunotherapy treatments that are in development that you'll see come over the next two to five years.

That's going to revolutionize cancer and replace chemotherapy for most types of cancers. Since this is such a game changer within biotech, I thought it would be a good first segment to look at.

ETF.com: In your view, immunotherapy's where the future is, not in chemo. So is this ETF in a way a growth fund?

Loncar: These companies will grow to the extent that they deliver value to patients. There are a handful of drugs that are on the market today. There have been approvals in melanoma; it's revolutionized melanoma, which used to be one of the most difficult cancers to treat. That's changed drastically.

They've been approved in melanoma, types of lung cancer, and most recently, kidney cancer and certain types of blood cancers. Over time, these immunotherapy drugs are going to be foundational. You're going to see them used for almost every type of cancer.

ETF.com: What's in this portfolio? And why is it equally weighted?

Loncar: It's equal weighted, and it's rebalanced and reconstituted semiannually. That happens every December and every June. Right now, we're capping it at 30 companies. And the reason we're doing that is we want the 30 top companies in this space. We’re following the market here, and owning the 30 largest, which is the market’s way of saying it believes these are the most credible in this space.

The way we've constructed the index is to have two categories: big pharma companies that have these drugs approved now—companies like Bristol-Myers and Merck—and companies you would more classically think of as biotech companies. These are smaller names that are solely focused on this specific area and are still in development and don't have drugs approved yet. So it's about 30% big guys, and about 70% of the smaller biotech.

Because it's biotech; it's going to be volatile, but those larger companies might add a little bit of an element of stability over the short term while the story is playing out. And over the long term, those smaller biotech companies will provide most of the growth.

ETF.com: Do you think this strategy could extend beyond cancer-specific treatment?

Loncar: Immunotherapy itself may have other applications. They're going to test it in what's called autoimmune diseases, like rheumatoid arthritis. But those are far down the line. If you're interested in this, specifically, you should know that its focus is on cancer; the idea here is that this will track the progress that’s being made in the fight against cancer.

Now, I do think there’s value in tracking other segments of biotechnology. If there's a message I could get across to people, it's that biotech is not one thing. That's something that's not well understood right now. And it's frustrating, because biotech has been the stock market's best sector since the financial crisis, and many people have missed it.

ETF.com: To put this ETF into the context of your expertise—the man behind the ETF—why the interest in biotech? How long have you been doing this?
Loncar:
I run a small family office in Kansas City, and we're biotech-focused. I've been doing that for almost 10 years. Before that, I'd been looking into biotech almost my entire life. I'm just a biotech junkie. It's a very rewarding sector to invest in, because these are important medicines these companies are creating.

ETF.com: Anything else you want to point out about CNCR?

Loncar: I wanted to point out that we signed a two-year partnership with a cancer research charity, Cancer Research Institute (www.cancerresearch.org). I'm donating a portion of my index royalties to them. And we're donating at a rate that's equal to 4 basis points of the assets of the fund.

The reason I think that partnership is important is because we see these breakthrough drugs coming to market, but behind them are decades of research. So, it's important to not only support the public companies that are working on these drugs, but also those who are doing the important basic research, because that will fuel the breakthroughs of tomorrow. It's a great organization. And we're very happy to support them.


Contact Cinthia Murphy at [email protected].

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