Sleeper Hit ETF Of 2020
It's mid-September, meaning it's time to break out the cozy sweaters, the pumpkin spice, and the hot takes on which ETF should rightfully be given the (highly subjective) title of "ETF Of The Year."
Lots of ink has been spilled—even by this author!—about the breakout launches of 2020—funds such as the Roundhill Sports Betting & iGaming ETF (BETZ) or the Direxion Work From Home ETF (WFH), which seemed perfectly designed to capitalize on this bizarre moment in which we find ourselves. (Read: "'BETZ' Paying Off For Investors.") Yet one ETF has quietly outshone them all.
The Global X Telemedicine & Digital Health ETF (EDOC) has been the sleeper hit of the summer: After just two months on the market, this health-care-with-a-twist ETF amassed $336 million in assets under management. (In comparison, BETZ and WFH are up to $114 million apiece.)
EDOC is neither the best-performing health care ETF out there, nor the cheapest. But it has captured investors' attention, if not the headlines, because of one simple fact: What EDOC promises to do, it does—very, very well.
Right Idea At The Right Time
At first blush, there appears to be nothing especially remarkable about EDOC. Since its inception on July 29, the fund has risen only 5%; compare that with other health care funds like the ARK Genomic Revolution ETF (ARKG), which has risen 16% since the same date. (Actively managed ARKG is a success story in its own right, one that ETF.com Managing Editor Cinthia Murphy has been tracking for months: Read "Does Active ETF Transparency Matter?" and "The Love & Hate Of Biotech ETFs.")
EDOC isn't much of a bargain, either. It's a full 60 basis points more expensive than the cheapest health care ETF, the Fidelity MSCI Health Care Index ETF (FHLC), a broad-based health care take that clocks in at just 8 basis points.
Where EDOC sets itself apart is in its unique thematic objective. The fund focuses specifically on only those companies with high exposure to telemedicine and digital health, two emerging sectors of the health care industry that have taken on unfortunate and increasing relevance as the global COVID-19 pandemic rages on. (Read: "Telemedicine ETF Launches.")
To be clear, even before the pandemic emerged, virtual medicine was already the way health care was trending; in recent years, doctors and hospitals have adopted artificial intelligence, mobile health apps and wearable technology in the pursuit of better health outcomes.
But as lockdowns linger and quarantines are reestablished, more and more patients can't or won't visit doctors' offices in person, and some fields, like mental health or heath/fitness coaching, have moved almost entirely to telemedicine. In this environment, an ETF tracking the infrastructure of virtual health and wellness makes downright intuitive sense.
Little Ownership Overlap
EDOC tracks global stocks across four main segments: telemedicine, health care analytics, connected health care devices and administrative digitization. The global focus here is important. Roughly two-thirds of all existing health care ETFs focus only on the U.S., and the pandemic, as we all know, isn't just a U.S. phenomenon.
Another thing that sets EDOC apart: Even though health care is a fairly crowded field of 52 ETFs, the fund manages to provide genuinely differentiated exposure.
Although many of EDOC's 40 holdings do appear in other health care ETFs, they do so only in trace amounts. For example, if you compare EDOC's top 10 holdings against their ownership by the 10 biggest health care ETFs in the space, you'll find little portfolio overlap:
10 Biggest Health Care ETFs' Ownership Overlap With EDOC | ||
Ticker | # of Stocks in Common | % of Portfolio Overlap |
5 | 4.0% | |
4 | 4.7% | |
31 | 5.8% | |
5 | 5.3% | |
2 | 2.9% | |
6 | 3.1% | |
9 | 4.0% | |
31 | 5.8% | |
8 | 13.6% | |
1 | 3.1% | |
Source: ETFAction; data as of Sept. 17, 2020
Only with ARKG does EDOC's portfolio share more than 10% of the same exposure. The rest contain 6% or less.
In fact, there are several stocks in EDOC that don't appear in any of the top 10 biggest health care ETFs, including Nuance Communications (NUAN) and Alibaba Health, which comprise 4.8% and 3.7% of EDOC's portfolio, respectively. (Nuance Communications is a speech-to-text software maker used by health care providers that record detailed notes about the hundreds, even thousands, of patients who may come their way in a month.)
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
Long Term Case For EDOC?
That said, to achieve its exposure, EDOC must cast a fairly wide net in its definition of what constitutes a telemedicine or digital health stock.
To be eligible to be included in the index, constituents must derive at least half their revenue, operating income or assets from the telemedicine/digital health sectors. That's different than most thematic ETFs, which select stocks based entirely on their revenues. (What precisely does it mean to have 50% of a company's assets in telehealth, anyway?)
Yet in practice, most of the stocks included within EDOC's portfolio make some level of sense, and there aren't any broad, nonpure-play conglomerate stocks diluting the exposure, as can so often happen in a thematic ETF. (Read: "Cloud Computing ETFs Going Sky High.")
Plus, despite its rapid growth, telemedicine is still a field in its infancy, and for some of the most promising companies, nonrevenue-based metrics may be more indicative of a company's exposure.
The real test for EDOC will be its longevity: Once the pandemic passes—and it will pass, one day, right?—will the investment case for EDOC pass along with it?
I wouldn't take that bet. Given the ease, convenience and safety of telemedicine, there's likely no going back to crowded waiting rooms and handwritten notes. The health care revolution is already here, and clearly, it's been digitized.
Contact Lara Crigger at lcrigger@etf.com
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