New ETFs On The Block: Market Vectors Generic Drugs ETF (GNRX)

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91551519Breakthrough drugs generally attract investors’ attention in the pharmaceutical industry although generics make up bulk of the sales in most geographics. Average life expectancy is rising, thanks to the wonders of modern pharmacology, and pushing consumers toward generic versions of expensive brands for cost reasons.

While exchange traded funds tracking the broader healthcare sector have become increasingly refined, nobody really put their focus strictly on the generics industry.

Market Vectors, the ETF arm of fund manager Van Eck Global, recently put the records straight by rolling out the first ETF targeting global manufacturers of generics and biosimilars.

The newly launched Market Vectors Generic Drugs ETF (GNRX) may appeal to investors that believe rising healthcare costs will increase public support for cheaper options to brand name drugs.

While generics are less expensive versions of brand name drugs, biosimilars are equivalent to medicines known as biologics, which are drugs generally harvested from living cells such as yeast. What generics are to brand names, biosimilars are to biotech – only several notches more complex to synthesize.

Given the jump in brand name prices, generics of late have witnessed heightened interest from policymakers and made them prime destinations for large scale mergers and acquisitions.  Research shows spending on generics globally is expected to increase to 46 percent in 2018 from 40 percent in 2013.

While generics make up 88 percent of all medicines dispensed in the US, they constitute 55 percent in the EU and 47 percent in Japan, respectively. According to Generic Pharmaceutical Association, less expensive generics saved Americans $1.68 trillion in the decade spanning 2005 to 2014 and a record $254 billion in 2014 alone.

Expiring patents on brand name drugs and fast development of biosimilars are the main drivers of generic Pharma, signaling GNRX is an investment idea whose time has come.

The passively-managed GNRX tracks the Indxx Global Generics & New Pharma Index, a gauge that houses many global drug majors that generate significant cash flow from generics. According to the index creators, back-tested data handily outperformed both the S&P 500 and the S&P 500 Healthcare Index from March 2005 through end of 2015 (The index went live in November last year).

The new fund has highest exposure in the US, followed by India, Israel, South Korea and Japan. Top holdings include Actavis, Teva Pharmaceutical Industries, Allergan, Mylan and Perrigo.

GNRX charges 0.55 percent annually.

Disclosure: No holdings

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