IDNA - IDNA: Continues To Underperform But With Long-Term Potential

2023-06-08 04:03:29 ET

Summary

• I rate IDNA a Hold due to its focus on biotech stocks with long-term growth potential in a rapidly growing healthcare industry.
• Despite impressive growth since its inception in 2019, IDNA has experienced a downward trajectory since 2021, with its current price lower than at inception.
• The healthcare industry is predicted to be the fastest growing industry in the US in 2023, with a 15% growth rate expected by 2027, making it a profitable long-term investment space.

I rate iShares Genomics Immunology And Healthcare ETF (IDNA) a Hold with a longer term time frame in mind. In 2023, Healthcare was rated the number one fastest growing industry. McKinsey estimates that the space will have a 10% CAGR between 2021 and 2026, indicating potential for significant expansion in this sector in the near future. This growth can be expected to be driven by technological advancements and a growing popularity for incorporating Artificial Intelligence into healthcare systems. As healthcare continues to adapt to this digital transformation, IDNA and its sector-specific focus should likely benefit from this rapid industry growth as well.

The fund has reported impressive growth since its inception in 2019, until it hit a peak in 2021 and experienced a downward trajectory since. As of June 2023, the fund's price is lower than its price from its inception. Despite its underwhelming performance in recent years, the main reason I rate IDNA a Hold is because of the fund's inherent focus on biotech stocks that have the potential for long-term growth and innovation, giving me optimism in the fund's ability to overturn its current downtrend in the long term.

Strategy

Launched and managed in 2019 by BlackRock Fund Advisors, this relatively new ETF invests in stocks of companies in a variety of sectors within the US healthcare industry, including health care equipment and services, pharmaceuticals, biotechnology, and life sciences. IDNA uses a representative sampling technique to track the performance of the NYSE FactSet Global Genomics and Immuno Biopharma Index. The fund’s portfolio uses a limited number of stocks, representing a sample, that are proportionally allocated based on the characteristics of the original index.

Holdings

IDNA’s holdings consist entirely of stocks within the Health Care sector. The portfolio's top 10 holdings tend to be equally distributed with each holding comprising either 4% or 5% of the entire portfolio. However, the top 10 holdings do constitute almost 50% of the portfolio, making the fund's performance especially sensitive to the performance of the top 10 holdings. Its portfolio extends to outside the United States, as more than 30% of its holdings are invested in countries such as France, Japan, and China. A comprehensive distribution can be seen in the pie chart below.

Strengths

IDNA’s has a large focus on the biotechnology sector that could potentially work in their favor. Biotech companies tend to be more resilient during economic downturns and inflation. The demand for healthcare products and services usually remains consistent during recessions, and a recession wouldn’t stop patients from taking medicine. For instance, the US national healthcare expenditures grew in the early 2000s, as well as in the global financial crisis from 2007-2009. While the pandemic did present challenges for drug developers, their rapid response ultimately significantly lessened the impact of the pandemic. Furthermore, biotech companies are often able to manage increased costs associated with inflation or a recession by transferring them to the consumer. With this in mind, I’m not saying that the biotech industry is set for significant growth in the near future, but I’m saying that these companies will provide a level of stability as a long-term investment, especially during uncertain economic times.

By focusing over 95% of its portfolio on a broader health technology sector, IDNA is closely tapped in with potential eminent developments in tech. The industry is definitely poised for substantial change, with a continuing shift towards digital health care and incorporating AI into healthcare services. Moreover, these new developments will ultimately require time to trickle down into the healthcare sector, which is why I view IDNA as a long-term investment. Investors in the space also have expectations that the biotech industry will likely outperform the S&P 500 by using a long-only strategy. The chart below from RBC Capital Markets provides a more precise distribution of investor expectations for the biotech space in 2023.

IDNA also benefits from the substantial growth this year from several of the portfolio's prominent stocks. Take Blueprint Medicines ( BPMC ), Exelixis ( EXEL ), and CRISPR Therapeutics ( CRSP ), for instance. These stocks have reported an increase of 31%, 18%, and 56%, respectively since 2023. These three stocks also account for about 15% of IDNA's portfolio. These high performers are all biotechnology companies, a sector that has produced strong valuations despite recession and inflationary concerns in 2022.

Weaknesses

Since IDNA invests primarily in growth and value stocks with a heavy focus in the biotech space, I thought it would be compelling to show a chart of Biotech IPOs throughout the last decade.

Since the beginning of 2020 up until 2022, there has been a significant downtrend in Biotech IPOs. While the overall biotech industry has still grown in these last few years, smaller biotech companies have struggled to take off amid stiff competition and difficulty in securing investments.

In addition to the downtrend in Biotech IPOs, IDNA has also experienced a significant downtrend since 2021. After peaking in the middle of 2021, the fund price has continued to decrease to a value lower than its price at its inception in 2019. Moreover, IDNA does not pay its investors dividends, which is particularly unfavorable considering the persistent decline in the fund’s price over the years. Often, investors tend to rely on potential capital appreciation when the fund’s dividend yield is low. As a result, the fund doesn’t offer any buffer to investors during market slumps, which definitely deterred many investors during the economic downturn in 2022.

Healthcare Industry Outlook

Healthcare is predicted to be the fastest growing industry in the US in 2023. The industry's expected revenue growth rate is 15% ($29 billion) by 2027. The Bureau of Labor predicts an opening of nearly 2 million jobs each year in the healthcare industry, with hires in healthcare representing 3.4% of all new hires in October 2022. McKinsey also predicts that the healthcare services and technology space should experience long-term growth supported by software and platforms, despite short-term volatility caused by recessionary and inflationary concerns. These positive industry projections make healthcare a profitable space to invest in for the long term.

Peer Comparison

Comparing IDNA to five of its peers, it is clear that IDNA has been underperforming since October 2022, and the gap is only becoming wider throughout 2022 and 2023. SBIO, PBE, and GNOM are all reporting positive return rates, while IDNA sits at an undesirable -14%.

This disparity is especially alarming when considering the profiles of IDNA and its peers. IDNA surprisingly has the lowest expense ratio out of the bunch at 0.47%, where the others SBIO, PBE, and GNOM have expense ratios of 0.50%, 0.57%, and 0.50%, respectively. If anything, this shows that IDNA is comparable to its peers, at least on the expense ratio front. If we look at the AUMs of the group, IDNA has the second lowest AUM, just higher than SBIO. The values can be seen in the table below. While IDNA aligns closely with its peer group in terms of these metrics, its total return rate undeniably sets it apart as an outlier.

Conclusion

IDNA benefits from primarily focusing on a growing industry, Healthcare Technology, and its global scope also helps in diversifying its portfolio. The overall healthcare industry is poised to grow rapidly in the long-term, and several of IDNA's biotech stocks have performed especially well in 2023. However, I do not believe that the performance of these select stocks can move the needle for the entire ETF at this time. IDNA's poor performance in the past few years also does not convince me.

I rate IDNA a Hold with a relatively long-term time frame. The fund is a relatively new ETF, having launched in 2019. The overall growth since its inception is quite impressive, and I cannot say that its poor performance in the past few years will continue for years down the line, as given the fund's similarity to several of its peers, I am optimistic that the fund may experience an uptrend and catch up with its peers with time.

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