Ozempic Weight-Loss Drug Having Heavy Impact on These ETFs

The weight loss drug Ozempic has stormed onto the scene, creating an ETF investor’s version of the phrase “you are what you eat.” 

Here, it is more accurately “you are what your portfolio owns.” For financial advisors and self-directed investors, Ozempic’s initial impact on the consumer sector of the stock market demands attention. 

Ozempic originally entered the medical universe in 2017 as a diabetes drug. Earlier this year, it gained appeal as a potential weight-loss solution. Studies have indicated patients averaged losing more than 10% of their total weight within six months of taking it. 

So, unlike the past three months when the S&P 500 shed about 10% of its value, Ozempic has now become a factor for analysts in the staples sector (where food-and-beverage stocks reside) and other industries. 

Ozempic Weight Loss Bulls 

Some Ozempic bulls believe that the prospect of many lighter people can affect retail clothing trends and even airlines, which would carry less weight.  

Corporate America has adjusted to a pandemic, higher inflation and changing office attendance preferences, and so it will likely adapt to this potential change. But as legendary value investor Benjamin Graham said, “In the long run, investing is a weighing machine, but in the short term it is a voting machine.” 

At a time of increased happiness regarding weighing, equity investors are voting against some stocks and industries previously considered to be “safe havens.” 

For example, the Consumer Staples Select Sector SPDR ETF (XLP), the oldest and largest exchange-traded fund devoted that sector, fell 12% from July 31 through Oct. 12, well below the loss of 5% in the SPDR S&P 500 ETF Trust (SPY).

'Equal Weight' Loss?

Consumer-staples stocks often lag rising markets based on their perceived defensive nature, but typically outperform SPY on the downside. Yet this recent period is one XLP’s worst relative returns on record since its 1998 inception. 

Weak periods of performance in XLP can often be tied back to its highly concentrated portfolio composition. Just four stocks make up more than 45% of assets, and so when a company-specific event affects a top holding, the whole ETF feels it. 

The Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RSPD), a $365 million fund that made its debut in 2006, is an alternative way to own a similar set of stocks, but with each stock having equal influence. But for those looking to recent events for confidence that diversification means better defense, RSPD has dropped 13.8% during that same period cited above.  

Ozempic Weight Loss Priced In? 

But as ETF investors know, just when you think you’ve exhausted the ways to isolate a market segment, there’s another level of niche. Food and beverage stocks are investable in a neat ETF package via little-known First Trust Nasdaq Food & Beverage ETF (FTXG).

The top 10 holdings of this 30-stock ETF correlate strongly with the type of businesses in the crosshairs of the weight-loss phenomenon that is Ozempic, making it a consideration as a proxy for this issue. It fell 16.5% during that July-October time frame. 

FTXG is not cheap at 18.3 times trailing earnings, and its yield (1.4% is not much of a cushion). But the bullish case for these industries, and perhaps the broader consumer sector, is that sellers have already bitten off more than they can chew. The shock factor is already out there, and FTXG has rallied a bit off its October lows. By contrast, RSPD and XLP have not bounced much yet. 

Ozempic Phenomenon: Contrarian Bet or Not?

It remains to be seen if this is a case of the first reaction by investors being the accurate one. Or, if FTXG represents one of the rare situations in 2023 where an entire industry can be bought at what turns out to be a deeply discounted price, in a year where contrarian ETF buys have more often led to lower lows.