EM Healthcare

USA

Emerging markets healthcare

KraneShares, the New York-based China ETF specialist, is listing an emerging markets healthcare ETF that uses FactSet’s Revere to define the sector. The KraneShares Emerging Markets Healthcare Index ETF (KMED) will track the Solactive Emerging Markets Healthcare Index in yet another sign that as far as the ETF industry is concerned it is all over for the big three index providers.

So far as sector and EM funds go, KMED is fairly straightforward. It uses a market cap approach to pick the biggest healthcare companies in emerging markets countries. To qualify companies must fit certain size and liquidity requirements. These include a minimum market capitalization of $100 million; an average daily trading volume of $1 million and have traded on 90% of the eligible trading days over the last one-month and six-month periods.

Analysis – been here before

KraneShares aren’t the first company to try their hand at an emerging markets healthcare ETF. Two others have already tried it. Deutsche Bank (Xtrackers) had a crack at listing one in London back in 2011 (XMEH:LN). The product traded sideways for five years and gathered no assets. It was eventually closed.

Something similar happened with the Columbia Threadneedle-backed EGShares Health Care GEMS ETF (HGEM:US), which also listed in 2011. It too gathered no assets and delivered no performance – then closed. The first question one might have for KMED is what makes this fund different?

The second – more critical – question is why should this fund succeed at all? For decades, we’ve heard the same soundbites on emerging markets and healthcare. Emerging markets are great because there is an “emerging” middle class. (If you ever want to sound like an authority on third-world markets – whatever they are – just talk about the increased influence of the “emerging” middle class.) Healthcare is great because of the “ageing population”. (As if the market didn’t already know that and hadn’t already adjusted healthcare valuations up accordingly).

Yet somehow it’s the rich countries, with the US in the lead, that keep providing all the returns, while big tech provides the most reliable growth. (Although admittedly healthcare has done well too). Our finger in the air tells us that this fund will struggle. But given the steep discounts at which Turkey, Brazil, Russia and China are currently trading, perhaps it could be a value buy.