New York-based Global X has added to its thematic line-up with an ETF providing exposure to the rapidly developing Chinese biotechnology industry.
China has designated biotechnology as a strategic emerging industry.
The Global X China Biotech Innovation ETF (CHB US) has listed on Nasdaq Exchange and is linked to the Solactive China Biotech Innovation Index.
The index includes biotechnology companies, as defined by FactSet, that are headquartered in Hong Kong or mainland China.
Firms must have a free-float market capitalization above $200 million and an average daily trading volume greater than $2m.
ADRs, Hong Kong-listed H-shares, Red Chips, and P-Chips, as well as Chinese A-shares available on the Stock Connect platform are all eligible for inclusion.
Constituents are weighted by float-adjusted market cap with a single security limit of 8%, as of each semi-annual rebalance in May and November. Additionally, the aggregate share of companies with weights greater than 5% is capped at 40%, and all remaining stocks are capped at 4.5%.
There are currently 27 companies in the index, the largest being Beigene (10.5%), Wuxi Biologics (8.9%), Shenzhen Kangt (8.8%), Changchun High (7.7%), and Sino Biopharmaceutical (7.0%).
The index has risen 183% since its inception in May 2017, highlighting how the rapid growth of China’s biotechnology industry has also been reflected in the segment’s stock market performance.
The fund comes with an expense ratio of 0.65% which is slightly cheaper than the $10 million Loncar China Biopharma ETF (CHNA US), the only other US-listed ETF to specifically target the Chinese biotechnology sector, which costs 0.79%. The Loncar fund tracks a proprietary index that only includes Chinese biotech stocks listed in Hong Kong or on Nasdaq Exchange in the US.
Investment case
China’s biotechnology industry is expected to continue benefiting from several tailwinds in the future. These include improving regulatory standards that are leading to higher-quality treatments as well as rising standards of living that are putting these innovative medicines within reach of more patients.
The pharmaceutical industry has also been designated by the Chinese government as a strategic emerging industry and is expected to receive ongoing state support through its “Made in China 2025” program.
Chinese biotechnology companies are also earning a reputation for being highly innovative. Recently, these companies have submitted a greater number of annual patents compared to their US counterparts despite China’s biotechnology industry being just one-tenth of the size of that of the US. These substantial research and development efforts may yield greater commercial results in the future.
Lastly, the Hong Kong stock exchange enacted a rule change in 2018 that has helped to attract greater Chinese biotech listings and increased global investor access to the segment. Over the past two years, 17 mainland Chinese biotech firms have raised over $5.1 billion through IPOs in Hong Kong.
Chelsea Rodstrom, Research Analyst at Global X ETFs, commented, “Biotech has the potential to truly transform healthcare by potentially unlocking treatments to previously incurable diseases and offering improvements to our general health. Leveraging our experience in thematic investments, as well as our expertise on Chinese markets, we believe that CHB accesses a key segment of the market and are excited to watch this space continue to grow.”
Timo Pfeiffer, Chief Markets Officer at Solactive, added, “There is a sheer force of innovation in life-science and biotech with a lot of revenue being put back into research and development. Hong Kong has become a key hub for biotech IPOs, and our new index takes advantage of this emerging center of innovation. With our involvement in the launch of the latest Global X ETF, we are pleased to help make this exposure investable for clients in the US.”
Global X also offers a full suite of ETFs that track each of the 11 GICS-defined sectors of the Chinese equity market and covers all major types of Chinese share classes. Each ETF comes with an expense ratio of 0.66%, and the suite collectively houses $380m AUM, although the majority ($270m) of that capital is within the Global X MSCI China Consumer Discretionary ETF (CHIQ US).