A Review Of The New GERM ETF

David Dierking

With the COVID-19 outbreak and the race to develop a vaccine or really any type of therapy that can combat its effects, the healthcare sector, and more specifically biotech, has gotten a lot of attention in 2020.

The Healthcare Select Sector SPDR ETF (XLV) is virtually breakeven on the year, making it the 4th best performing of the 11 major sectors, but biotech has been a big outperformer. The market cap-weighted biotech ETF, the iShares Nasdaq Biotechnology ETF (IBB) is up 16% year-to-date and the equal-weighted biotech ETF, the SPDR S&P Biotech ETF (XBI), is up 21%.

While those funds target the broader biotech space, a new ETF is set to target the narrower vaccine development and treatments space.

The ETFMG Treatments, Testing and Advancements ETF (GERM) is designed to give direct exposure to the biotech companies directly engaged in the testing and treatments of infectious diseases with a focus on advancements in the forefront of R&D, vaccines, therapies and testing technologies.

Screen Shot 2020-07-08 at 10.40.55 AM

While the timing of GERM's launch certainly coincides well with the current coronavirus pandemic, it's looking to capitalize on a trend that has persisted for decades.

Screen Shot 2020-07-08 at 10.43.54 AM
source: ETFMG and the World Health Organization

As you can see from the data provided by ETFMG, the current health pandemic crisis is just one of many that have afflicted the world over the past decade and longer. COVID-19 is getting all the attention now because it's affecting the entire world, both other events, including ebola and SARS, have significantly impacted areas of the world during their time.

It's easy to assume that GERM is targeting the coronavirus pandemic, but, in reality, it's more of a longer-term play on a bigger health issue unlikely to resolve itself anytime soon.

GERM's Composition

The focus of GERM is on both treatments and testing with a strict focus on the biotech sector. That means no companies focusing on ancillary products, such as masks and cleaning products.

Screen Shot 2020-07-08 at 10.48.16 AM
source: ETFMG

Within the fund, you've got roughly a 2/3 - 1/3 breakdown between the treatments and testing subgroups. GERM holds a lot of lesser known names, but you'll also recognize a couple of companies that have been in the news recently.

Screen Shot 2020-07-08 at 10.50.36 AM
source: ETFMG

Moderna (MRNA) got a lot of attention when it announced positive initial results for a vaccine that it was developing, although it's come back down to earth a little bit in recent weeks. On the testing side, Laboratory Corporation of America (LH) and Quest Diagnostics (DGX) are also high on the list.

Assessment

I find this to be an interesting product that should certainly fill an investor interest gap. Most biotech ETFs take a broader focus and simply include companies involved in the industry. Others target companies based on what their drug portfolio looks like i.e. do they have approved drugs or are they still in the testing/approval process.

GERM's narrower focus should allow it to better zero in on a specific niche market that is likely to see steady and consistent demand for years. The split allocation between treatment and testing companies also allows it tackle both ends of the pandemic life cycle.

The expense ratio of 0.68%, while not cheap, is about in range with what you'd expect from a niche-focused fund.

Since it's a new fund, it's asset base is still small making trading costs and spreads potentially higher, but hopefully after some time and a progressive asset build, that issue will slowly resolve itself.

More ETF Research

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