Weight-Loss ETFs: Analyzing the Benefits and Risks

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With over 10% of the global population now affected by obesity, the demand for weight-loss solutions has surged, reflected in the rising share prices of companies offering innovative treatments. Two new exchange-traded funds (ETFs), Roundhill GLP-1 Weight Loss ETF (OZEM) and Amplify Weight Loss Drug and Treatment ETF (THNR), have emerged, attracting investors eager to capitalize on the success of weight-loss drugs. However, industry experts advise careful consideration before investing in these ETFs.

Launch of New Weight-Loss ETFs

On May 21, both OZEM and THNR launched with an expense ratio of 0.59%. These ETFs heavily weight their portfolios towards industry giants Eli Lilly and Novo Nordisk, accounting for approximately 40% of OZEM and 30% of THNR. These two companies are the only licensed providers of GLP-1 agonist drugs for weight loss, marketed under the names Zepbound (Eli Lilly) and Wegovy (Novo Nordisk).

Effectiveness of GLP-1 Agonist Drugs

GLP-1 agonist drugs have demonstrated significant effectiveness, promoting a reduction in body weight by 10-20%. Initially developed for diabetes treatment nearly two decades ago, these drugs are now showing promise in weight loss and reducing risks of heart attacks and strokes. Anecdotal evidence also suggests they may help curb cravings for substances like alcohol.

Market Performance and Growth

The success of these drugs has driven substantial sales growth. Novo Nordisk reported a 30% increase in Q1 sales for diabetes GLP-1 drugs and a 40% increase for obesity care drugs compared to the same period in 2023. This impressive performance highlights the market potential for weight-loss treatments.

Cautions and Considerations

Despite the excitement, investors should be aware of potential long-term challenges. Historically, the quest to “solve obesity” has seen numerous failures. Kenneth Lamont, a senior research analyst at Morningstar, cautions that the current success of GLP-1 drugs may not be sustainable in the long run.

Historical Context of Weight-Loss Drugs

A VettaFi research paper outlines a series of failed weight-loss treatments, dating back to 1933 when 2,4-Dinitrophenol (DNP) was found to cause weight loss but was later deemed dangerous. Subsequent drugs like benzedrine, methamphetamine, and rainbow pills also failed due to severe side effects.

Competition and Future Developments

The early market advantages held by Eli Lilly and Novo Nordisk could diminish as new drugs receive approval. Future treatments may offer improvements, such as less frequent administration, oral formulations, and fewer side effects, potentially eroding the dominance of current GLP-1 agonists.

Potential Impact on Other Treatments

The success of GLP-1 drugs could influence the use of other treatments provided by pharmaceutical companies, particularly for heart disease. This shift may impact overall market strategies and product portfolios.

Benefits of Investing in ETFs

Investing in weight-loss ETFs, like THNR, offers exposure to a broader range of companies, including those developing new drugs and involved in manufacturing essential components, such as injection devices. Christian Magoon, CEO of Amplify, notes the growth potential for the injectable GLP-1 drug market, despite current challenges like insurance coverage limitations.

Active Management in ETFs

Dave Mazza, CEO of Roundhill, emphasizes the importance of active management in fast-evolving industries. Active strategies can better navigate rapid developments, similar to the approach seen in the generative AI sector.

Evaluating ETF Concentration

While thematic ETFs like OZEM and THNR promise diversification, they also present concentrated bets. OZEM includes just over 30 constituents, while THNR comprises slightly over 20. Lamont points out that investors might achieve similar exposure by directly purchasing a few key stocks, potentially saving on ETF fees.

Conclusion

Weight-loss ETFs OZEM and THNR provide exciting opportunities for investors looking to tap into the booming market for obesity treatments. However, it is crucial to weigh the potential benefits against historical pitfalls, market competition, and the concentrated nature of these ETFs. Careful consideration and active management are essential for navigating this dynamic and rapidly changing sector.

More company news: Novo Nordisk Launches Campaign for Injectable Weight-Loss Drug Wegovy

Source: FT