Nothing Generic About This ETF's Long-Term Outlook

Investors are often regaled with tales of the efficacy of investing for the long term. The idea has its detractors and supporters. At the sector level, healthcare has proven to be a long-term winner, and the fundamental outlook, one that in large parts centers around aging populations in developed markets, is compelling.

Among individual exchange-traded funds that should benefit from the healthcare sector's long term is the Market Vectors Generic Drugs ETF GNRX.

A Generics ETF

GNRX, which debuted in January, tracks the Indxx Global Generics & New Pharma Index. That benchmark “is intended to track the overall performance of companies that derive a significant proportion of their revenues or that have the potential to derive a significant proportion of their revenues from the generic drug industry, or that have a primary business focus on the generic drug industry,” according to Market Vectors.

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While GNRX came to market as the healthcare sector was retreating, some data points underscore the rookie ETF's potential over the long haul. For example, $309.5 billion was spent on prescription drugs last year with 60 percent of that tally spent on generics. Spending on prescription drugs could reach $400 billion by 2020.

“Looking ahead, the biologics patent cliff over the next decade could add to a new group of affordable generics or so-called biosimilars. Biologics are drugs derived from animal or other biological sources to treat diseases, as opposed to chemically based pharmaceuticals,” according to ETF Trends.

Holdings, Exposure And Allocations

GNRX's exposure to biosimilars is about 15 percent of the ETF's lineup.

Further bolstering the case for GNRX is that the government is taking steps to prevent massive price hikes on some drugs.

“Regulators, particularly the Food and Drug Administration (FDA), are already taking to help create cost savings through competition. The FDA's focus has been on the approval process of Abbreviated New Drug Applications (ANDA), which may allow generic drug companies to benefit from expedited drug approvals,” according to Market Vectors.

Well-known names among GNRX's 79 holdings include Israel's Teva Pharmaceutical Industries Ltd (ADR) TEVA, Perrigo Company plc Ordinary Shares PRGO and Mylan NV MYL. The ETF does not currently own shares of the controversial Valeant Pharmaceuticals Int Inc VRX, but it does devote 2.6 percent of its weight to the also controversial Mallinckrodt Plc MNK.

“According to the Generic Pharmaceutical Association (GPhA), 88 percent of the drugs dispensed in the U.S. are generics,” according to Market Vectors.