Inside HealthShares

Cancer and heart disease are top killers around the world and in the U.S. HealthShares offers two such ETFs. How close are these companies to actually solving these complicated diseases?Currently, we treat the symptoms of those diseases. If a patient has cancer, chemotherapy or radiation is used to destroy the tumor. Recently, a biotech company called Dendreon received preliminary approval for a prostate cancer vaccine. This vaccine deals with the cancer at the molecular level. While it is potentially an important drug, only about 10 percent of prostate cancer patients will benefit from it. That is still enough to make it a $2 billion drug.

Coronary blockage is dealt with through surgery. As we evolve from pharmacology to customized medicine, we will increasingly see that the new drugs will benefit only a subset of the total patient population because of the genetic differences in human beings.

Is someone who isn’t part of the medical field at a disadvantage in understanding which of these areas provides the better opportunity?I agree with your assessment. But there are people who are knowledgeable about these companies and therefore may find these portfolios useful. Then there is another perspective. A young diabetes patient who is facing the cost of treating the disease for the rest of his or her life might see a benefit in owning a portfolio of the very companies that will provide treatment. In general, we have found that individuals who deal with chronic disease on behalf of a family member or themselves (over 100 million people in the U.S. have some form of chronic disease) are quite familiar with the companies that are working on new therapies and have an interest in investing in them.

Is there a relationship between the explosive growth of both hedge funds and ETFs? Also, what does it mean for middle-of-the-road mutual funds?I believe these products have developed independently of each other and for different reasons. Hedge funds have been around for decades but have recently come into vogue because pension funds find themselves behind the eightball. Just as liquidity drove the 1982-2000 bull market, that same phenomenon is driving private equity and hedge fund returns. ETFs are a product of technology; they are an evolutionary improvement over mutual funds. I believe ETFs will continue to draw assets from mutual funds though a bull market will stop that process to some extent. Hedge funds, too, will suffer in a bull market.

What’s your assessment of the ETF marketplace? Some argue that it’s become too crowded and if we see the introduction of active ETFs it could get even worse. What do you think?There are about 12 firms with the exemptive order necessary to issue ETFs. I expect there will eventually be at least several dozen. There are about 7,000 mutual funds with $10 trillion in assets. There are projections that ETFs will reach $2 trillion in the next four years or 20 percent of mutual funds’ AUM. That would imply we could have 1,400 ETFs (there are currently less than 500).

I believe the market doesn’t need another mid-cap SPDR or any other broad index funds, for that matter. The growth of ETFs will be in narrow well-defined indexes across both style and sector. There will be ETFs that replicate a variety of investment strategies for equities, fixed-income and commodities as well as combinations of all three. There will be more regional ETFs and affinity group ETFs. Far from being crowded, the field is sparse.

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Ron DeLegge is the San Diego-based editor of www.etfguide.com.