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The healthcare industry is booming, so it’s no surprise that investors have flocked to opportunities in this sector. Yet most investment vehicles focus primarily on large-cap incumbents and sideline new innovators. In July 2021, Nasdaq partnered with Lux Capital, a $4 billion venture capital firm focused on innovation and health technologies, to develop an index that fills the gap: the Nasdaq Lux Health Tech Index™ (NQHTEC™).
Many companies are developing products that leverage technology to prevent, diagnose, treat, and rehabilitate disease and illness. Traditional players tend to specialize in medical devices and diagnostics as well as data, software, hardware and robotics. The average age of the top 10 medical device companies is around 96 and they have weathered the ups and downs of many market cycles. These are analog companies that have adapted over time, but they are not digital natives. On the other hand, dozens of newer companies – many of which have been listed on the Nasdaq Stock Market over the past 20 years – have incorporated disruptive technology into their products to bring new functionality and value to the healthcare industry. health.
NQHTEC is designed to capture exposure to both historically stable incumbents as well as many small, innovative and high-growth companies.
“What we’ve tried to do with the weighting of this index is to make sure investors get direct exposure to real innovation in healthcare,” says co-founder Peter Hebert. and managing partner of Lux Capital. “This doesn’t just reflect the healthcare components of S&P. Instead, it is designed to capture the integration of modern technology into the healthcare system. In our view, this is new and unique, and arguably one of the biggest secular trends of the coming decades.
The 59 constituents of the index are primarily high-growth companies that focus on disruptive technologies in healthcare. About 83% of the index weighting comes from the sub-$50 billion market capitalization contingent, and about 61% of the weighting comes from the top 10 names. It is weighted by modified market capitalization: the top five names are capped at 8% and the rest are capped at 4%. Companies come not only from the United States, but also from the Netherlands, Sweden and China.
It is important to note that there is a revenue growth contingent. New additions to the index must show that they have increased their income by at least 10% in each of the last two years prior to admission. To stay in the index, they must increase their income by 7% in at least one of the last two years.
“The index is designed to capture companies that have revenue growth,” says Hebert. “We methodically select the highest quality companies that represent this theme, not companies that have certain industry codes that reflect this theme.”
Medical equipment is the largest sub-sector, accounting for nearly 50% of the index weighting. Biotechnology and healthcare services are the two largest subsectors. A few of the constituents are in the medical supplies and medical services business, and others offer software.
“This structure differentiates the NQHTEC from other healthcare and life sciences indices that either focus on large-cap pharmaceutical companies or biotechs,” says Hebert. “These companies have generally not captured the same benefits of digital technology.”
NQHTEC’s major holdings include Intuitive Surgical (ISRG), a pioneer in robotic surgery and creator of the da Vinci® Surgical System. Known for its Invisalign® product, Align Technology (ALGN) was one of the first companies to apply additive manufacturing and 3D printing to dentistry. Veeva Systems (VEEV) provides electronic health record software that transforms healthcare systems, and Illumina (ILMN) specializes in genetic sequencing. DexCom (DXCM) provides continuous glucose monitoring and Insulet (PODD) provides the Omnipod® injectable drug delivery system.
Admittedly, the life sciences sector has been in a bear market since 2021, and the general technology sector peaked in November 2021 and then fell back. That said, NQHTEC may be attractive to investors interested in a long holding period. They can take advantage of this opportunity through the First Trust Nasdaq Lux Digital Solutions ETF (EKG), which tracks the index.
“NQHTEC is not designed to be an exercise in market timing, and volatility is to be expected given the overall market and the risks people perceive in rising interest rates,” Hebert points out. . “Like many other high growth opportunities, there is inherent risk. But in our view, this is a new way to construct a portfolio to reflect the secular growth of health technologies.
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