My Prescription for Wall Street: A Diabetes ETF
Does the investing world need another exchange-traded fund?
When contributor Andy Obermueller proposed making a case for the formation of a diabetes ETF, I was skeptical. After all, according to Bloomberg, during a recent five-year period, 1,050 ETFs were launched, while 900 ETFs had folded. It’s a jungle out there.
Then Andy started throwing some of his own research back at me. The fact that the disease touches a lot of lives — some 34.2 million Americans (about 1 in 10) have adult-onset diabetes, commonly known as Type 2. The fact that one in four U.S. healthcare dollars goes to diabetes treatment. The fact that a number of pure-play diabetes companies have not only beat the market recently but crushed it. The inevitable spread of the disease to the rest of the world, as developing countries increasingly adopt the same sorts of diets that got us into trouble in the first place.
Suddenly, the idea didn’t seem so far-fetched. Any takers?
— Bob Bogda, Editor
P.S. Like what you see? Don’t like what you see? Let me know.
You are not alone.
Scientists estimate the body is made up of 30 trillion individual cells. That’s less than half the story, though: You actually contain some 69 trillion cells. The others are microbes, bacteria, viruses and other bits of sub-cellular detritus. Fact: 50% to 80% of human feces is actually discarded bacterial matter, not digested food.
The point is not to gross you out. The point is that your immune system is vastly outnumbered and, thus, keeps extraordinarily busy.
It’s also effective: Of the 10 nonillion — that’s 10 to the 31st power — types of viruses that exist on earth, only about 200 infect humans. Fewer than 100 of the 30,000 known species of bacteria can make people sick. When these noxious little bugs appear, the body surrounds them with a phalanx of white blood cells that whisk them away like some sort of teensy intravenous paddy wagon. Your immune system, properly harnessed, not only handles bacteria and viruses, it can kill a malignant tumor. It can also destroy the pancreas.
I know because it happened to me.
About 40 years ago, I contracted a normal childhood infection, likely strep throat. My body, to fight it off, unleashed a torrent of antibacterial jihad. After a week or so, I got better. Then I grew worse, and my blood sugar levels rose too high. Thinking my harmless pancreas was some sort of invader, my evidently xenophobic immune system went all Rambo. In addition to attacking the virus that was making me ill, it also annihilated my beta cells, which are special little engines in the Islet of Langerhans in the pancreas that generate insulin, a hormone that lets the body extract energy from sugar. As my blood glucose levels rose, my body, unable to process it, actually started to starve. This causes everything downstream to go haywire. In technical medical terms, it is no bueno.
This condition is known as Type 1 diabetes. It tends to emerge in childhood when the immune system overreacts. Type 1 cases represent about one in 20 diabetes cases overall, and about 40,000 Americans learn they have the condition each year. It is treated by testing blood glucose often, administering insulin and constantly monitoring diet and exercise. It’s a rough ticket: Diabetes never takes an hour off. Patients must conduct an unending metabolic symphony to manage the condition. It is not easy.
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Type 2 diabetes is far more common. In fact, a number of public health officials were using the word “pandemic” to describe the rise in Type 2 diabetes long before COVID. Type 2 is generally thought to be brought on when the body can no longer produce enough insulin to regulate the metabolism. This is most frequently caused by obesity. Obesity is a side effect of affluence. As the world grows richer and as developing economies begin to generate surpluses, people eat more. A cursory glance of the world’s calorie consumption shows they tend to eat too much: The richest country in the world, the U.S. of A, delivers each resident an average of 3,800 calories a day. The Department of Agriculture recommends — and nutrition labels are based on — a 2,000 calorie diet. Americans eat twice that. So it’s not especially surprising that two-thirds of the diabetes cases in the world’s 37 developed nations are Americans, according to the International Diabetes Foundation’s 2015 Diabetes Atlas.
About 1 in 10 Americans has Type 2 — some 34.2 million of our neighbors, according to the 2020 National Diabetes Statistics Report prepared by the Centers for Disease Control. Worldwide, the total number of diabetics amounts to half a billion. The condition is a sneaky, relentless foe that not only affects the patient’s mood but also can lead to retinal damage, infertility, heart disease and renal failure.
Treating diabetes is ghastly expensive: The latest cost estimate I found, in the journal Diabetes Care in 2018, pegged the annual cost to treat a diabetic patient at $16,752, which is $552 more per year than the average U.S. mortgage. The total U.S direct outlay for diabetes care is $250 billion, which is roughly the same as the gross national product of Finland. Diabetes, a huge and growing problem, is a big and extremely lucrative business. There is, alas, no cure.
Investors are always looking for new ways to put their money to work, and they tend to like ways that limit risk. In the early years, that was difficult: Investing directly in stocks was expensive and risky, especially prior to the FDR administration, which created the Securities and Exchange Commission and leveled the playing field somewhat.
A decade or so earlier, in 1924, Wall Street came up with something new: The mutual fund. The idea was to pool individual investor funds together and hire a professional to manage the pool. Each mutual fund has a series of rules governing what types of securities it is allowed to invest in, and the manager is obligated to follow these rules. This costs money: Mutual funds charge management fees, now typically between 0.5% and 1.0%, though they can range higher and were higher for many years. Some funds also carry sales charges called loads, which routinely exceed 5%.
The kicker is that most mutual funds fail to exceed the broader market over time, and investors are loathe to pay managers for subpar performance. So, Wall Street started looking for another, cheaper investment vehicle. This had its genesis in late 1975 with the Vanguard S&P 500 Index fund, which allowed investors to harness Wall Street’s benchmark at very low cost for the first time. What drove the costs lower? An index fund doesn’t need a manager to pick stocks — the fund’s purchases are based on the companies listed in the index. Index funds quickly gobbled up a huge share of the market, Today, about half of U.S. stock assets are invested in them.
More recently, yet another innovation came to the market called exchange-traded funds (ETFs). These were functionally identical to index funds except in that they are priced by the market in real time rather than the once-a-day Net Asset Value (or share price) of a mutual or index fund. These indexes are pegged to all sorts of metrics: You can buy ETFs that track industries, currencies, commodities — really just about anything. Last month, the Direxion Work From Home ETF (WFH) began trading. All told, investors can choose from an eye-popping 7,000 ETFs.
And here’s something you might not be able to believe: There is not an ETF that specially tracks the diabetes segment of the health-care industry. That’s a little surprising given recent studies that show one in four U.S. healthcare dollars goes to diabetes treatment — testing supplies, medical equipment, prescription drugs and, of course, insulin.
If there were a diabetes ETF, what could we say about it? Suffice it to say the historical data suggest it would be a stellar long-term investment. Here’s a look at the leading diabetes companies. This unofficial index is made up of U.S.-listed companies with a primary focus on diabetes care and a market cap of at least $300 million:
|12-Month Return||PE Ratio|
|Novo Nordisk (NVO)||24%||26.8|
|Tandem Diabetes (TNDM)||63%||N/A|
|Livongo Health (LVGO)||352%||N/A|
Wall Street needs to exploit this critical market niche and develop an ETF to track the diabetes segment. The gains are just too good, and they’re likely to get better.
I don’t have the bandwidth to launch an ETF (but I’m available for consultation!). If I did, the diabetes space would be my preferred hunting ground. As the world develops, its leading health concern will be diabetes. It’s past time for Wall Street to deliver an ETF to harness this unstoppable worldwide medical tsunami. The most promising trends in this space are continuous blood sugar monitoring devices, such as those made by DexCom (DXCM), and cutting-edge insulin-pump technologies, devices that deliver insulin all the time rather than via frequent subcutaneous injections.
I recommend that you look for the pure plays and focus on the nimble innovators rather than diversified healthcare giants like Johnson & Johnson or Roche. Insulet (PODD) is a strong contender, and its products are every bit as good as those by legacy manufacturers like Medtronic (MDT).
Until Wall Street releases a diabetes ETF, aggressive growth investors seeking extra-market returns are prudent to load up on pure-play diabetes stocks. I’ll be keeping an eye on this space.
In the meantime, it wouldn’t kill you to forgo dessert. Okay, maybe just eat half.
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Dec 14th, 2020