Genomics investing 101

By Gergana Koleva

When a scientist thinks about genomics, some of the first things that come to her mind may be genome sequencing, CRISPR, even direct-to-consumer ancestry DNA tests. But run this same question by a Wall Street analyst and you will find the allure of the field extends far beyond the lab.

The explosive growth experienced in the DNA sequencing, editing, and gene therapy space has inevitably spilled over onto the stock market with a ramp-up in investments and funds for companies advancing the field of genomic science. According to a report published last year by Research and Markets, the world´s largest market research store, the North America genomics market is expected to reach $13.3 billion in 2025, up from $5.9 billion in 2017, growing at an annual rate of 11% in the intervening years. [1] On a global scale, the DNA sequencing market is forecast to grow at an annual rate of 19%, from $6.2 billion in 2017 to $25.5 billion in 2025, according to research by Global X, a New York-based provider of exchange-traded funds (ETFs). [2]

Yet for all the potential the sector offers, many investors without a strong scientific background may be hesitant about their ability to smartly pick individual genomics stocks. That´s where biotech ETFs come in; in the last couple of years many of them have increased their holdings of such assets in light of the encouraging panorama. In essence, genomics-heavy ETFs are betting that the genetic and genomics industry is going to outperform the broad market. Investing in them makes sense when one is unable to evaluate companies in a highly emerging field such as the genomics space or, on the contrary, is bullish enough about them that they want to stake a claim to a whole sector.

Where to find genomics ETFs

U.S.-listed ETFs that cater to investors optimistic about the high growth potential of the genomics market do not, by and large, come labelled as such. There are a few notable exceptions: ARK Genomic Revolution ETF (ARKG), Global X Genomics & Biotechnology ETF (GNOM), and iShares Genomics Immunology and Healthcare ETF (IDNA) are the explicitly named entities among the cohort of biotech ETFs traded in the U.S. As a class, biotech ETFs – a roster of 18 funds, according to latest data from ETFdb.com, the world´s largest independent ETF-centric database – are a subset of healthcare ETFs. [3]

The main value proposition of these thematic funds is that they allow investors with a single stroke – or rather, a single trade – to access dozens of companies positioned to gain from advances in genomics science. Something which could be well worth the risk, given that genomics ETFs may include up to 50 holdings (using ARKG as an example).

Active vs. passive management

Conventional thought on investing holds that passively managed funds are the best choice for the vast majority of people, since their holdings track an index and as such move in line with the broader market. By contrast, actively managed funds imply a human element: a manager or a team of managers hand-picking stocks by applying proprietary research, expertise, market timing, and judgment to try and beat the market, which means the funds´ stocks rise or fall at least in part as a result of direct manager choice.

Two interesting examples of each approach from within the genomics ETF universe are the funds GNOM (passively managed) and ARKG (actively managed). Both of them hold a basket of stocks that stand to benefit from advances in genomics science: the former tracks the Solactive Genomics Index, which monitors the price movements of the shares of 37 genomics and genetics companies, while the latter picks investments a la carte after careful due diligence of the underlying companies. Insofar as investors have a lower or higher tolerance for risk and depending on their view on the value of “high-touch” stock selection, they may opt for one or the other.

Point of view matters

Management style is relevant to genomics ETFs because the knowledge domain they pertain to has a high barrier to entry, meaning that the long-term prospects of a company´s innovation may be more substantively evaluated by a geneticist than by an investment advisor.

In a Reddit thread discussing the benefits of investing in an actively managed fund, for example, one user shares the insight that “if you have a hobby, you probably know a lot more about it than an analyst that spent 6 hours researching it. The market for your hobby might be small, so the larger investors don´t pay attention.” Granted, genomics science is much more than a hobby for the community of scientists and physician-researchers who dedicate their careers to it, but the comment touches on the notion that those working “in the trenches” of the genomics enterprise have an intrinsically more informed view on how likely an innovation is to triumph on the market, based on the underlying value of its offering.

So if you are thinking about dipping your toes in genomics investing for the first time, your best approach may be either going through a specialized ETF or making some friends in the genetics and genomics research community. As a former statistics professor of mine used to say, “No matter what you do, it´s always good to have a statistician in your back pocket.” Or, in this case, a geneticist.

 

References:

[1] https://www.globenewswire.com/news-release/2019/05/17/1826734/0/en/North-America-13-3-Bn-Genomics-Market-to-2025.html

[2] https://www.globalxetfs.com/science-behind-genomics/

[3] https://etfdb.com/etfs/industry/biotechnology/

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