Editor’s note: An earlier version of this article incorrectly stated that Solactive’s Blockchain index, tracked by Horizons in Canada, used natural language processing. Solactive’s index Blockchain index does not use NLP, at all, it uses RBICS industry classifications. Further changes were made to reflect this. We regret the errors. –ED
Biotech ETFs are some of the best performing of all time. For that reason there is always interest from investors and ETF providers.
Aiming to get a slice of the action, Global X is listing its first biotech and genomics ETF, which will fit in with its broader thematic offering. The Global X Genomics & Biotechnology ETF (GNOM) will track a Solactive index made up of healthcare biotech and genomics companies from rich countries.
To qualify, companies must make 50% of their revenue or assets from genomics or biotech. To find companies fitting this criterion, Solactive uses a “proprietary natural language processing algorithm” on public documents like regulatory filings, earnings transcripts, etc. to see how directly exposed to genomics they are.
The highest ranking companies identified are then double-checked by Solactive to make sure they really are biotech and genomics companies.
The fund follows in the footsteps of ARK Invest, whose actively managed ARK Genomic Revolution ETF (ARKG) has raked in more than $250M assets since it listed back in 2014.
From what we gather, a “proprietary natural language processing algorithm” is just another way of saying keyword search. It’s very similar to what you do when you press control + F on your keyboard.
Why do we bring this up? Because the way that the index picks genomics companies, looks to us quite like a glorified control + F. It’s an inexpensive and easy way of doing things. It also has obvious weaknesses. These include that the index selection can get duped.
A good example of how this can happen is Riot Blockchain.
Riot Blockchain, formerly called Bioptix, was nominally a biotech startup. Perhaps amusing, the company changed its name in the middle of 2017’s bitcoin boom, causing its stock price to quadruple in two months before sinking back down three months later. The name change also duped some index providers, which proceeded to clarify the company as a blockchain getup. For example, it was included under RBICS as a blockchain company.
Can Solactive beat the index trolls?
The good news here is that Solactive seems to have checks in place to stop this kind of duping. For this new Global X product, there’ll be a manual check to ensure that the companies identified by the “proprietary natural language processing algorithm” are actually in genomics and biotech. That’ll hopefully prevent the mistakes of past being repeated. And for investors that’s a positive.