The Next Big Thing: 'Medical Marvel' ETFs

'Medical marvel' stocks have caught the eye of the exchange-traded fund (ETF) community, with this month's U.S. launch of the Loncar Cancer Immunotherapy ETF (CNCR) already pulling in over $10 million of assets, and the trend might just catch on in Europe.

CNCR is the latest eyebrow-raising ETF to launch, as investors clamour for exposure to high-growth stocks in niche sectors via a low-cost fund.

The Big C

Cancer is an all too familiar word, but immunotherapy is perhaps less familiar. Radiotherapy and chemotherapy are traditional cures, but immunotherapy is the latest innovation in the fight against cancer, that may one day eliminate the need for aggressive therapies altogether. Chemotherapy kills both healthy and cancerous cells, whereas immunotherapy mobilizes the body's own immune system to fight back. It can even halt terminal cancer, with promising results in treating skin and lung cancer in clinical trials.

Biotechnology investor Brad Loncar believes in the science so much, he created the Loncar Cancer Immunotherapy Index and worked with ETF guru Christian Magoon to launch CNCR on the Nasdaq.

"Historically, cancer research over decades has always been very incremental. A drug might extend a person's life by a couple of months. With immunotherapy, it's a sea change compared to [the treatments] we are used to," said Loncar.

The CNCR ETF has 30 holdings, of which just seven are stalwart names like Bristol-Myers Squibb. The rest are high-growth biotechnology names, such as biopharmaceutical company Kite Pharma, that can offer investors high returns, said Loncar.

A Big Biotech Success?

Loncar wants CNCR to be as big as HACK, an ETF that tracks companies in the cyber security sector. It has yet to celebrate its first birthday but has already wooed investors to the tune of $1 billion in assets under management (AUM). CNCR has had a strong start, attracting over $10 million of inflows in less than a week.

"In a way, I'm trying to replicate HACK's success in a biotech fashion. I think with HACK – people reading newspapers, seeing stories about cyber security in the news everyday – it makes sense to them,” said Loncar. “They might not have the expertise to pick individual cyber security stocks; we're trying to do same here with CNCR.”

Magoon has also played a part in launching both HACK and CNCR, and is somewhat more cautiously optimistic about achieving the same runaway success. He believes that CNCR has the potential to be promising in the long term, but in the short term it is "up in the air", due to the recent sell-off in biotechnology stocks.

CNCR is evolutionary, rather than revolutionary, said Eric Balchunas, senior ETF analyst at Bloomberg. He predicts it could enjoy similar success to the Robo-Stox Global Robotics & Automation ETF (ROBO:US), which has garnered over $100 million since its launch two years ago. A smaller success than HACK, but a success nonetheless. ETF Securities decided to launch a UCITS-compliant version last year on the London Stock Exchange (ROBO:LN), the first European ETF to gives investors exposure to the global robotics and automation sector.

Cross Atlantic Appeal

Could an ETF like CNCR be replicated in Europe?

"If ROBO can go to London, so can this. This could go global, cancer is such a universal theme. Everyone knows about this," said Balchunas.

European investors tend to take a more broad-based approach as opposed to investing in sub-sectors, said Magoon. But niche ETFs are catching on in Europe, with the recent launch of ISPY:LN – the European version of HACK – and ROBO:LN. Both were introduced to European investors following initial success in America.

Higher Costs For Innovation

The incentive for product providers like ETF Securities is clear – they can charge investors significantly more. Expense ratios for ETFs that track major indices can come to as little as 4 basis points, meaning the provider gets a cut of $4 per $10,000 invested.

But ROBO:LN and ISPY:LN track bespoke indices and have annual expense ratios of 95 and 75 basis points respectively, while CNCR’s fee is also comparatively high at 79 basis points. Investors will pay the price to gain exposure to high-growth stocks that are not found in traditional indices like the S&P 500.

Bullish On Biotech

One comparatively similar sector that is taking off now in Europe amongst the ETF community is biotechnology. Last year provider Source launched the continent's first biotechnology ETF, the Source Nasdaq Biotech UCITS ETF (SBIO). In terms of performance, it has been a "rollercoaster ride", according to Source's head of equity product management, Chris Mellor. Performance of SBIO peaked in July, but is now down 22 percent and year-to-date returns are a meagre 1.5 percent. Despite that, AUM has increased from $50 million to over $61 million in the past month, said Mellor.

The biotechnology sector may be volatile but, historically, it has reaped rewards for investors and beat the S&P 500 for the last three years running. The Nasdaq Biotechnology Index returned a stellar 32.29 percent, 65.97 percent and 34.40 percent in 2012, 2013 and 2014, respectively. Returns are trailing at 0.05 percent this year, but market participants attribute that to a volatile summer and remain confident on the sector.

Meanwhile, investors can expect to see more 'medical marvel' indexes. Boston-based Dr Bhavneesh Sharma, a trained doctor who turned his hand to finance at Vasuda Capital Management, is preparing to launch two new equal-weighted biotechnology indexes in the next month. He worked with German-based index provider Solactive to create an Emerging Oncology index and a Rare Disease/Orphan Drug Index. He hopes to attract the interest of ETF providers.

"The Loncar [index] only covers one part of the oncology revolution, there are a lot of different oncology therapies, like small molecular or targeted molecular therapies," said Sharma.