ETFs
Weight Loss ETFs Require Careful Consideration
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With over 10 percent people around the world now suffer from obesity, it’s no surprise that the share prices of purveyors of the latest weight-loss drugs have surged.
But investors seeking exposure through two recently launched weight-loss exchange-traded funds should ask themselves whether they are the best way to gain exposure to this generation of drugs, industry observers say.
The Roundhill GLP-1 Weight Loss ETF (OZEM) and the Amplify Weight Loss Drug and Treatment ETF (THNR) both launched on May 21 with the same expense ratio of 0.59 percent. The two companies also have an extremely heavy combined weighting – around 40 percent in the case of OZEM and 30 percent in the case of THNR – in favor of industry heavyweights Eli Lilly and Novo Nordisk.
The two pharmaceutical companies are currently the only companies authorized to provide GLP-1 agonist drugs for weight loss under the brand names Zepbound, which is Eli Lilly’s version, and Wegovy, supplied by Novo Nordisk.
There is plenty to be excited about. The medications have been found to promote a reduction in body weight of between 10 and 20 percent. GLP-1 drugs, or semaglutide, have been used to treat patients for nearly two decades, since the first iteration was approved to treat diabetes, but their use cases are increasing. Results from a long-term trial of Wegovy and Ozempic, Novo’s diabetes drug, showed they can also reduce the risk of heart attacks and strokes and there are anecdotal reports of success in reducing the craving for things like alcohol.
The sales growth resulting from the success of these drugs is breathtaking. For example, Novo Nordisk reported First quarter sales growth of around 30 percent compared to the same period in 2023 for GLP-1 diabetes drugs and around 40 percent for obesity drugs.
But there are some obstacles, as industry observers point out. The first concerns the long-term prospects of the drugs themselves.
“Solving obesity is one of the modern holy grails of the pharmaceutical industry, with many false dawns,” said Kenneth Lamont, senior research analyst at Morningstar.
A recent research paper from VettaFi, provider of the VettaFi Index of Weight Loss Drugs and Treatments tracked by THNR, outlines some of the concerns.
The researchers point to a long history of such false dawns beginning in 1933, when 2,4-dinitrophenol (DNP), previously used in pesticides, was found to cause weight loss and began to be prescribed for obesity. In 1935, the United States Food and Drug Administration called it “extremely dangerous” and unfit for human consumption.
Other drugs in the rogues’ gallery in subsequent decades included amphetamines such as benzedrine, methamphetamine, and so-called “rainbow pills.”
Investors should also be aware that the early advantages enjoyed by Eli Lilly and Novo Nordisk could be eroded as new drugs in development are approved with the potential for improvements such as less frequent administration, by pill rather than by injection, and fewer side effects. (Patients are currently reporting nausea and vomiting as well as even more serious side effects such as intestinal obstruction).
Additionally, the success of these drugs, if continued, could impact future use cases for other treatments offered by pharmaceutical companies, for example for heart disease.
However, the idea of being willing to capture the success of other vendors’ drugs in development could be an argument for considering capturing the weight-loss drug frenzy through an ETF rather than investing in the companies directly. THNR, for example, includes companies whose drugs are expected to hit the market soon. But it also includes Fujifilm Holdings, which is involved in manufacturing the injection devices for which there is a shortage.
Christian Magoon, chief executive of Amplify, believes the shortage was one of the bottlenecks that indicated there was greater growth potential for the injectable GLP-1 drug market. The other is the fact that many insurance companies do not fund medications as part of regular medical coverage.
Dave Mazza, managing director of Roundhill, was keen to emphasize the importance of his fund’s active strategy given the rapid pace of new developments in the industry. “Just as we have seen in the area of generative AI, the ability to use active management is beneficial.”
Lamont still wondered, however, whether the wisest route for investors was to use these ETFs.
They represent very concentrated bets: OZEM has just over 30 constituents while THNR is even more concentrated at just over 20.
“One of the touted benefits of thematic ETFs is that they allow easy diversification of these risks, although in the case of OZEM, for example, even that seems limited,” Lamont said.
“We also have to ask ourselves why you should pay an annual fee of 0.59 percent when we can get 50 percent of the same exposure by purchasing just four shares of OZEM,” he added.