Lux Capital Launches Digital Health Solutions ETF: EKG

When it comes to getting the most diversification bang for your buck, it’s hard to beat exchange traded funds (ETFs) which typically offer the performance of whatever index they’re tracking for a reasonable expense ratio. While ARK Invest made waves by releasing active ETFs that attempted to beat the markets, your typical ETF simply tracks an index that’s offered by a provider whose sole job is to provide exposure to a particular investing theme. There’s usually a methodology document that accompanies an index so that any interested party can understand how the index constituents are selected, weighted, and change over time.

Fintech firms like Motif Investing tried their hand at allowing the public to create their own baskets of stocks, but they eventually shuttered, and their intellectual property was acquired by Charles Schwab. Now, there’s another fintech startup that believes “great investors and investment ideas can come from outside of the established asset management firms.” They’re called Thematic, and they’re backed by notable emerging tech investor Lux Capital.

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Credit: Thematic

Disturbing Themes with Thematic ETFs

Thematic ETFs provide exposure to a universe of stocks that share a particular sector, industry, or some other common link. We wrote about how thematic ETFs work a couple of years ago, and have covered a number of these based on our emerging tech categories, including robotics, IoT, and space. A lot of these ETFs are often rubbish. In many cases, the stocks in the index are only tangentially (at best) related to the theme. For example, the space ETFs we reviewed didn’t provide the sort of pure-play coverage you’d expect growing up on a diet of Star Trek and Star Wars. Instead, they were filled with aviation and defense firms, along with slow-growth communication companies. 

Rise of thematic ETFs.
OMG that’s a lot of AUM growing under thematic ETFs. Credit: First Trust

Another concern with thematic ETFs is that many are jumping on the hype train for the technology du jour. In fact, according to bookish types who study such things, the worst time to buy thematic ETFs is when they launch, the Financial Times reported. That’s because the funds usually miss the wave at the peak of the hype cycle and instead get swept away in the undercurrent as the tide goes out. The article went on to note that the research, which analyzed various ETF categories between 1993 and 2019, found that their value nose-dived almost in step with the launch of the funds:

Performance of ETFs before and after peak hype.
A sure way to kill the hype is to launch an EFT, according to researchers. Credit: Financial Times

So, it’s with eyes wide open that we consider a new thematic ETF, the First Trust Nasdaq Lux Digital Health Solutions ETF (EKG). The parties involved include:

  • Thematic – the aforementioned startup that wants to democratize the index creation process
  • First Trust – one of the fastest-growing ETF providers globally – they say – with one of the worst websites known to man
  • Lux Capital – an iconic New Yawk City venture capital firm focused on emerging technology and co-founded by nanotechnology OG Josh Wolfe

Today, we’re going to look at the top-ten stocks in this new life sciences ETF which currently represent around 62% of the overall exposure.

A Digital Health ETF

EKG is tapping into the current zeitgeist around digital health, a wide-ranging category that for this ETF includes exposure to companies focused on “healthcare technology innovations in medical and surgical devices, clinical diagnostics, healthcare-related business/productivity software or some other healthcare technology identified as digital health.” Consider that digital health startups pulled in a record-breaking $57.2 billion in funding in 2021, up 79% from 2020 totals, according to the big brains at CB Insights. Big tech companies like Amazon have been seriously sniffing around the digital health space for the last few years. And it’s a topic we’ve covered extensively, from AI healthcare solutions to telehealth.

We’ve worked with a number of ETF providers over the years to help them launch ETFs and it’s no easy task. If you’re charging 0.65% expense ratio like EKG is, you’ll need a decent chunk of assets under management (AUM) to pay the bills. The Catch-22 is that many investors won’t invest in an ETF unless it has a decent amount of assets – anything over $100 million would be considered to have enough traction to pay the bills based on what we’ve observed. As EKG launched just a month ago, they have several million in AUM – at least according to Yahoo Finance. But that number should change quickly as the index provider, First Trust, has about $210 billion in AUM under supervision, about 13% of which, or $27 billion, are sitting in thematic ETFs:

First Trust thematic ETF assets.
Credit: First Trust

Lux Capital is behind the universe of stocks that make up EKG, and they’re also an investor in Thematic, the startup that helped them build the index. At first blush, the ETF appears to be abiding by its digital health theme, with 59 holdings as of April 22, 2022, many of which we have covered, such as Guardant Health (GH) and Teladoc (TDOC). There are also some familiar names among the top 10 holdings, which account for about 62% of the fund and represent more than $367 billion in value (company names link to our past research pieces):

TickerMarket CapPercentage
Dexcom, Inc.DXCM$43.2B9.63%
IQVIA Holdings Inc.IQV$43.6B8.98%
Illumina, Inc.ILMN$50.7B8.95%
Intuitive Surgical, Inc.ISRG$90.6B7.87%
Align Technology, Inc.ALGN$28.4B6.39%
Hologic, Inc.HOLX$18.5B4.71%
ResMed Inc.RMD$33.3B4.18%
Abiomed, Inc.ABMD$13.5B3.92%
Insulet CorporationPODD$17.3B3.80%
Veeva Systems Inc.VEEV$28.4B3.64%
Total EKG top 10$367.5B62.07%
Credit: Nanalyze

We’ve covered four of the top five, leaving us six companies that Lux believes are leaders in digital health. While our own tech stock portfolio is already overweight in the Life Sciences category, it doesn’t hurt to see what else we may be missing out on, especially the No. 2 company of the list.

A Big Data Digital Health Company

Click for company website

If you believe that solving the healthcare crisis is all about analyzing big, big data, then IQVIA is the company for you. We briefly came across the $43 billion digital health company while researching our article last year about a competitor called Science 37 (SNCE), which was going public by merging with a special purpose acquisition company (SPAC). Science 37 is focused on digitizing clinical trials, which is also a core business area for IQVIA. The former reported nearly $60 million in revenue last year, while the latter had revenues of nearly $14 billion, a 22% increase compared to 2020.

IQVIA performance
Credit: IQVIA

As you can see above, IQVIA is outpacing its main competitors (based on its own assessments, of course). In fact, the company believes that its “breadth of the intelligent, actionable information we provide is not comprehensively available from any other source and our scope of information would be difficult and costly for another party to replicate.” Not surprising, given that IQVIA has compiled 1.2 billion “comprehensive, longitudinal, non-identified patient records spanning sales, prescription and promotional data, medical claims, electronic medical records, genomics, and social media.” In recent years, the company has gone all-in on using machine learning and other types of artificial intelligence to unearth insights for its customers, which includes more than 85% of the world’s pharmaceuticals based on 2020 sales. This is how revenues breakdown by geography and revenue type:

IQVIA revenues
Credit: IQVIA

No single customer accounts for more than 10% of revenues, though the company’s business is concentrated in the United States and United Kingdom at 34% and 10%, respectively. Keep in mind that the United States spends more than any other country on R&D, so that’s not a big concern. 

Five Digital Health Companies

IQVIA is definitely intriguing and deserves a deeper dive in a future article. Meanwhile, we’ll briefly profile the bottom five of the top 10 holdings in EKG.

A Diagnostics Digital Health Company

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Hologic is a diagnostics, imaging, and surgical products company focused on women’s health. The company operates four segments: Diagnostics, Breast Health, GYN Surgical, and Skeletal Health. It sold off a fifth business, Medical Aesthetic, at the end of 2019. About Nearly 90% of its revenue comes from sales of products related to these business units, such as molecular diagnostic assays to screen for disease or image analytics software utilizing artificial intelligence. The rest relies on service revenue associated with equipment repair and the like.

Hologic revenues.
Credit: Hologic

Hologic adheres to a weird fiscal year accounting system, so 2021 fiscal year results were released last November. It had a 67% jump in revenue, largely thanks to a pandemic bump associated with its two diagnostic COVID-19 assays. Specifically, the company more than doubled revenue from those tests, from $929 million in 2020 to $2.16 billion in 2021. Another reason for the jump: Hologic outright acquired, took controlling interest, or bought the assets of nine companies over the last two years. Most of those revenues rolled into the final total for 2021. Before then, the company had been slowly growing revenues, and we’d expect to see a return to that narrative as COVID testing wanes and the acquisitions are fully integrated.

A Sleep Apnea Digital Health Company

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Another digital health company with an odd fiscal year structure, ResMed is a medical device company that primarily provides cloud-connected CPAP equipment for treating sleep apnea, as well as products for other respiratory-related conditions such as chronic obstructive pulmonary disease. The company reported $3.2 billion in revenue last fiscal year (ending in June 2021), with earnings of $474.5 million. ResMed is one of two major manufacturers of sleep apnea devices. A recent study estimated that up to one billion people experience the condition at varying degrees of severity, so there’s no lack of patients. The problem is that more than one study has also noted that CPAP adherence is pretty low because it turns out most people can’t sleep with a mask on their face. The paper said the results called “into question the concept of CPAP as the gold-standard of therapy.”

A cpap machine
The latest thing collecting dust on people’s nightstands. Credit: ResMed

That’s led to upstarts trying different approaches, such as Inspire Medical Systems (INSP), which has seen its market cap grow from about $323 million to more than $6 billion in four years. (We covered them back in 2019.) The company has developed a system that uses electrostimulation to help keep the airway clear. Revenue increased more than 100% between 2021 and 2020, and the company claims a $10 billion total addressable market (TAM) in the USA alone. It’s another company that may merit a second look in the future.

A Heart Device Digital Health Company

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The heart of Abiomed’s business is a smart implantable heart pump branded under the line Impella. The devices use sensors and other tech to enable the heart to rest by improving blood flow and giving a helpful pump here and there. The company reported $848 million in revenue in 2021, which pretty much flatlined from the previous year. “Flatline” is not a word you want to hear when talking about heart health. However, heart disease is the world’s No. 1 killer, so there’s probably still room to grow revenues. In fact, Abiomed issued guidance of $990 million to $1,030 million for 2022, representing 17% to 22% growth. So far, the company appears on track to make good on those projections. 

A Diabetes Digital Health Company

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While diabetes (ranked No. 7) doesn’t kill as many people as heart disease, it is a comorbidity to cardiovascular disease and other health conditions. More than 400 million people worldwide have diabetes, with no immediate cure in sight. Until that day, diabetics are being offered better ways to manage their condition digitally. That’s where Insulet Corporation comes into the picture. Its flagship product is Omnipod, which provides up to three days of automated insulin delivery to help patients manage blood sugar. It also markets the system for other types of automated drug delivery. Nearly all of its $1.1 billion in 2021 revenue, up 21.5% from the year before, came from Omnipod for diabetes. Investors have been pretty bullish on the company for the last five years, during which it has returned about 480% compared to 115% for the Nasdaq.

Omnipod
Credit: Insulet Corporation

The company at the top of the EKG ETF universe, Dexcom, is another diabetes digital health company that does diagnostics with a much larger market cap that we might like better, so head-to-head comparison may be in order down the line.

A Cloud-Based Digital Health Company

Click for company website

Veeva plays in the same sandbox as IQVIA by offering cloud-based software, data, and consulting services to life science companies, including pharmaceutical companies doing R&D development for new products. Veeva has also been locked into a five-year legal battle with IQVIA over what one news site described as a dispute over physician databases. The latter alleges that the former misappropriated data and used it to develop a competing product. Now, we have to do a IQVIA vs Veeva cage match article in the near future. Even more awkward: The two companies share customer contracts and technology.

Meanwhile, Veeva hauled in $1.85 billion in revenue last year, up 26% from $1.46 billion a year ago. About 80% of its revenue comes through recurring subscriptions, a business model we especially value, so the cage match is definitely on.

Conclusion

The First Trust Nasdaq Lux Digital Health Solutions ETF has assembled what appears to be a fairly solid lineup among its top 10 assets. While we don’t invest in ETFs, many of our readers and subscribers work in finance and aren’t allowed to trade stocks, so they look for ETFs to invest in. Once EKG attracts a decent amount of AUM it might be worth a punt given it contains some quality assets that are now beaten down like all tech stocks are at the moment. At least you won’t have to worry much about the ARK effect. In the future, we may come back around and take a closer look at some of the stocks we’ve talked about today.

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