GNOM - GNOM: A Genomics ETF That Will Have Its Day Even If Not Right Now

2023-05-28 04:02:14 ET

Summary

• GNOM is a $200 million ETF that invests in a forward-looking set of innovative businesses focused on the genomics industry.
• This is a long-term growth area, but it will need to get more profitable to get more popular. That could take a little while.
• I rate GNOM a Hold for now, but it definitely gets a spot on my watchlist.

Global X Genomics & Biotechnology ETF ( GNOM ) is not for everyone. In fact, it might really only appeal to a very niche-seeking type of investor. Furthermore, it way down in price, but there is no immediate catalyst to lift it higher, even in a market environment that, based on the headlines, would make us think that an ETF that invests in emerging biotech stocks would be pretty attractive right now.

However, if GNOM proves anything right now, it is that the stock market is highly-focused on bigger companies in a very narrow set of sectors. Biotech is not one of them. But that only means that GNOM is not an urgent one to own right now. Going forward, especially should we see a real "clearing" of speculative, narrow-minded investing of the type we've seen in 2023 so far, GNOM could be just the ticket for investors comfortable with the concept of owning a basket of high-risk, high potential reward innovators in the medical field.

Thus, my current rating on GNOM is a Hold. But this relatively undiscovered ETF from a solid provider, Global X, is definitely on my watchlist from here forward.

The Genomics opportunity

As described by its issuer, The Global X Genomics & Biotechnology ETF ((GNOM)) seeks to invest in companies that potentially stand to benefit from further advances in the field of genomic science, such as companies involved in gene editing, genomic sequencing, genetic medicine/therapy, computational genomics, and biotechnology.

Genomics is a field with tremendous long-term growth potential. For instance, genomic sequencing and genetic medicines are creating an environment where processes like drug development and precision medicine can be made more efficient and cost-effective. According to Global X's research in this industry, "the cost of genomic sequencing has dropped from nearly $100mm per genome in 2002 to less than $1,000 in 2020. Adoption has continued to rise, as costs plummet."

FactSet's description of GNOM indicates that it uses a well-thought-out, disciplined process to arrive at its basket of emerging businesses.

The fund fleshes out its description of this sector by including companies that derive more than 50% of their revenues from the following five business activities: (i) gene editing, (ii) genomic sequencing, (iii) development and testing of genetic medicine/therapies, (iv) computational genomics and genetic diagnostics, and/or (v) biotechnology. The fund uses a proprietary natural language processing algorithm to identify and rank eligible firms based on public documents, such as filings and disclosures. The market-cap-weighted index is reconstituted and rebalanced semi-annually.

The GNOM opportunity: good things come in small packages?

With assets of just over $200 million, GNOM is not a widely-known healthcare ETF. Its average daily dollar volume is just over $1 million, so it is liquid enough for many retail investors, though the biggest institutions will likely choose to buy the underlying stocks directly, or settle for a more broadly-based, mega-cap-oriented biotech ETF.

However, ETF liquidity has much more to do with the liquidity of the underlying ETF stock holdings, not how much trading volume occurs in the ETF itself. Any reputable ETF provider has set up multiple trading relationships that allow their ETF's "basket" of stocks to be traded almost instantly upon receipt of a buy or sell order. This may be the most misunderstood aspect of ETFs.

That said, the best indication of an ETF's liquidity may be its bid/offer spread, and this is a slight drawback for GNOM. Its spread is on the high side at 0.29% (about 4 cents). But that has more to do with the fact that it tends to own smaller, somewhat experimental-stage biotech firms. That comes with embedded risks, such as I've noted above.

GNOM started over 4 years ago, and tracks the Solactive Genomics Index. It is described by the issuer as a "global" ETF, but over 90% of the current portfolio is in US companies, so that's a bit of an overstatement. The portfolio is market capitalization-weighted, and with a $15 billion weighted average market cap, I consider GNOM's holdings to be at the low end of "large cap."

Return potential? Yes. Risks? Plenty of them.

Perhaps the biggest eyesore in reviewing this ETF is its negative P/E Ratio. It currently stands at more than -12x trailing earnings. Translation: this is basket of about 40 stocks that are, in the aggregate, not mature, profit machines. There is likely to be some hit-and-miss within its holdings in the coming years. For a risk-seeking investor, that's acceptable. For someone seeking to invest more broadly in the relative stability of the healthcare sector, GNOM is likely one to pass on.

The chart above shows this vividly. In its four year history, GNOM has already gained more than 30% in a three-month period on 4 separate occasions. Yet it has also lost that much in that amount of time 3 different times. So, this ETF is not for the timid.

2023 has not been particularly kind to the biotech sector, nor to GNOM's portfolio as a whole. Here is a chart showing the path of returns so far this year for GNOM, as well as iShares Biotechnology ETF ( IBB ), a concentrated large cap biotech ETF, and Invesco QQQ Trust ( QQQ ), which I consider to be a very broad indicator of investor desire to take on risk. As the chart clearly exhibits, QQQ has had a stellar first five months, while biotech of all sizes has lagged severely. This is an indication that in a very narrow stock market, GNOM is not being viewed with the same excitement that mega-cap tech and AI companies are.

Current Investment Opinion

GNOM is a Hold for me, but a definite addition to my watchlist. It is going to have its day, probably once investor interest returns to a more broad-based affinity for the next tier (down in size) of stocks, in industries like this one which offer high return potential, albeit at above-market levels of risk.

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