Unlock Explosive Gains: Ultimate Guide to Investing in Weight Loss Drug ETFs Dominating the Obesity Market

The rise of GLP-1 drugs and other weight management solutions has created a burgeoning market, attracting significant investor interest. New health sector ETFs aim to benefit from popular GLP-1 drugs. Weight-loss drug exchange-traded funds offer a targeted way to invest in the growing weight-loss market, but these ETFs come with the inherent risks of a new and potentially volatile investment. This article provides a comprehensive overview of weight loss drug ETFs, their potential, risks, and the key players in this evolving landscape.

Introduction

Obesity is a global health crisis, with a recent study in the Lancet estimating that 1 billion individuals globally live with obesity. This number is projected to nearly double in the next decade. In the United States today 42% of adults are considered obese. Obesity is the root cause of many chronic diseases including cardiovascular disease, the number one killer, but also diabetes, liver and kidney disease. In fact, it is associated with over 200 different co-morbidities.

The emergence of a new generation of breakthrough weight loss drugs, like Ozempic/Wegovy and Mounjaro/Zepbound, is ushering in the biggest pharmaceutical market on the planet potentially worth $500bn by 2030. This surge in potential has led to the creation of specialized investment vehicles: weight loss drug ETFs. Understanding these ETFs requires a grasp of the underlying science, market dynamics, and associated risks.

What Are Weight Loss Drug ETFs?

Weight-loss drug ETFs are a new and niche type of fund that specifically focuses on companies developing and marketing medications that help people shed pounds. They offer investors a way to gain exposure to the growing market through a single investment. These ETFs are a recent development, reflecting the increasing interest and potential of weight-loss medications, particularly GLP-1 drugs. Unlike broad healthcare ETFs, weight-loss drug ETFs concentrate on companies involved in this specific segment of the pharmaceutical industry.

The Science Behind GLP-1 Drugs

For many years, scientists like Professor Jens Juul Holst, characterized the function of a gut hormone called GLP-1. GLP-1 is an incretin in that it stimulates the production of insulin in beta cells, reducing blood sugar levels. This feature led to attempts to develop drugs that mimic GLP-1 for diabetes. Scientists also found that GLP-1 inhibits gastric emptying and promotes satiety. This showed up in trials where patients lost weight, paving the way for the development of these drugs for obesity as well.

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GLP-1 drugs, also known as glucagon-like peptide-1 receptor agonists, are a relatively new class of medications used for both type 2 diabetes and weight management. They work by mimicking the effects of a natural hormone in your body called glucagon-like peptide-1 (GLP-1). GLP-1 is a hormone produced in the gut that plays a role in regulating blood sugar, appetite and satiety (feeling full). GLP-1 drugs essentially act like GLP-1, stimulating the GLP-1 receptors in your body. In people with type 2 diabetes, GLP-1 drugs help regulate blood sugar by stimulating insulin release after eating and suppressing glucagon, a hormone that increases blood sugar. For weight management, GLP-1 drugs work by reducing appetite and increasing feelings of fullness. They may also slow down the emptying of your stomach, keeping you feeling satisfied for longer and potentially reducing calorie intake. GLP-1 drugs are currently only available as injectable medications. They are typically administered once a week or less. Some popular GLP-1 drugs include semaglutide (Wegovy and Ozempic), liraglutide (marketed for diabetes as Victoza), and dulaglutide (Trulicity). Like other weight loss medications, GLP-1 drugs work best when combined with a healthy diet and exercise program for sustainable weight loss. These drugs may also produce side effects, such as nausea and stomach pain.

To make GLP-1 analogs work well required solving two key challenges - a high enough dose and making the drug last longer in our bodies i.e. a longer half-life. This was achieved by Novo Nordisk with semaglutide, marketed as Ozempic for diabetes and Wegovy for obesity. Following closely behind was Eli Lilly’s tirzepatide (Mounjaro/Zepbound) which combined GLP-1 with another incretin hormone GIP. Today there are two next-generation weight loss drugs approved by the FDA - semaglutide (Wegovy) and tirzepatide (Zepbound). These drugs were first approved in diabetes under brand names Ozempic and Mounjaro, respectively.

Market Dynamics and Growth Potential

Since the approval of Wegovy for obesity in 2021 the obesity market has grown sevenfold to $24bn in 2023. Current analyst estimates for the market’s potential keep rising. The current state of the market is being held back by several forces. First, supply is severely constrained as peptide manufacturing is expensive and requires billions of capital expenditure and years to build certified plants. Second, private and public coverage is being restrained by worries about affordability. Finally, pricing is a very political issue despite the substantial health benefits and third-party cost-effectiveness data.

Anti-obesity medications have the potential to become a $500bn market, the largest pharmaceutical market on the planet. By 2035 there will be 2bn obese individuals, and up to 4bn if one includes the overweight, a staggering 46% of the world’s population. Yet today only 1-2% of obese individuals are treated by medications like GLP-1s, a penetration rate that should increase dramatically. One outstanding feature of the obesity market is the proportion of out-of-pocket spend. In a survey, 5% of Americans said they would pay $1,000 or more per month for these drugs. 50% said they would pay $100 per month. Aside from aesthetic benefits, the clinical data portfolio of weight loss drugs is substantial. Data has shown substantial benefits in diabetes, cardiovascular, liver, and kidney disease. This vastly expands the market potential. There is also early evidence and ongoing confirmatory trials that GLP-1 drugs could work in Alzheimer’s and even addiction.

Pros and Cons of Investing in Weight Loss Drug ETFs

Before buying shares of a new weight-loss drug ETF, investors should consider the potential benefits, such as growth potential, as well as the potential drawbacks, including regulatory hurdles:

Pros

Targeted exposure to a growing market: The weight loss drug market is projected to experience significant growth due to rising obesity rates and increasing demand for effective weight management solutions. ETFs offer a way to capitalize on this potential growth with a single investment.
Diversification: While focused on a specific sector, weight-loss drug ETFs still provide some diversification by holding shares in multiple companies involved in developing, manufacturing, or distributing weight-loss drugs. This spreads risk compared to picking individual stocks.
Convenience: ETFs offer a convenient way to invest in this sector without having to research and pick individual companies. They trade similarly to stocks, allowing for easy buying and selling.
Potential for high returns: According to Amplify ETFs, the GLP-1 drug market is anticipated to grow from $6 billion to $100 billion by 2030. If the weight-loss drug market booms, weight-loss drug ETFs may see higher returns.
Diversified Portfolio: Buying a weight loss ETF means at once buying a diversified portfolio of stocks purely exposed to GLP-1 and obesity. This includes both established players but also smaller emerging biotechnology firms, that might make attractive acquisition targets.

Cons

New and volatile: Weight-loss drug ETFs are a new investment option, and as such, they might be more volatile than established ETFs. This means the price could fluctuate significantly in the short term.
Limited track record: Due to their recent launch, there's a limited track record to assess their long-term performance. How these ETFs will perform over several years is uncertain.
Dependence on a few companies: Some weight-loss drug ETFs are heavily concentrated on just a few companies, such as Eli Lilly and Company (LLY) and Novo Nordisk (NVO). If one or two companies underperform, it could significantly impact the entire ETF's value.
Regulatory hurdles: The development and approval process for new drugs can be lengthy and complex. Regulatory setbacks could hinder the growth of the sector and impact the ETF's performance.
Affordability and Coverage: Coverage of these drugs means payment upfront with health and other social benefits accruing over decades. Tighter and reduced coverage could mean slower growth.
Market Exuberance: The stock market is prone to bouts of exuberance and one could argue the combined market cap of Novo Nordisk and Eli Lilly already reflects rosy estimates of the obesity market.
Dynamic and Evolving Market: Investing in weight loss drugs requires understanding where the puck is going. The future of weight loss drugs will focus on addressing some of the major issues with GLP-1s.

Weight Loss Drug ETFs List

As of late 2024, there are several weight-loss drug ETFs on the market:

Tema Obesity & Cardiometabolic ETF (HRTS): Launched in November, this actively managed ETF seeks to provide long-term growth of capital by investing in companies leading the fight against obesity and cardiometabolic diseases. HRTS has $62 million in assets under management and its expense ratio is 0.75%. The fund is also exposed to cardiometabolic disease more broadly providing a wider vector of growth and innovation. HRTS is actively managed by Dr David Song MD PhD CFA, a fund manager with over 25 years of industry and investing experience, and his team. HRTS also benefits from a scientific advisory board that includes the pioneer of GLP-1 Professor Jens Juul Holst.
Amplify Weight Loss Drug & Treatment ETF (THNR): This newly launched fund provides access to global companies involved in the pharmaceutical manufacturing of GLP-1 agonist or related businesses. THNR has $1.5 million in AUM and its expense ratio is 0.59%. It tracks a float-adjusted market-cap index developed by VettaFi. The portfolio holds 28 companies that are involved with GLP-1 drugs as well as the broader supply chain supporting this segment. names.
Roundhill GLP-1 & Weight Loss ETF (OZEM): Another newly launched fund, OZEM is an actively-managed ETF that focuses on GLP-1 weight-loss drug manufacturers with more than 40% of the portfolio allocated to pharmaceutical companies, Eli Lilly and Novo Nordisk. OZEM has $3.5 million in AUM and its expense ratio is 0.59%. Roundhill believes that weight loss drugs, including GLP-1 agonists, represent one of the most revolutionary advancements in the global pharmaceuticals industry.

Other ETFs with Exposure to the Weight Loss Market

iShares US Healthcare Providers ETF (IHF): While not exclusively focused on weight loss drugs, IHF offers exposure to healthcare providers, many of whom offer wellness programs that can benefit from the increased interest in weight management.
The Obesity ETF (SLIM): SLIM tracks the performance of global companies offering obesity-related services, including healthcare, biotechnology, pharmaceuticals, plus-size clothing, weight loss programs, and medical devices.
VanEck Pharmaceutical ETF (PPH): PPH's focus on pharmaceuticals includes companies involved in the development of weight-loss and treatment drugs.

How to Invest in Weight Loss Drugs

There are several options for investors when faced with the question how to invest in weight loss drugs. Investors could try to pick the best weight-loss drug stocks. Alternatively, they could buy an ETF specialized in weight loss like the Tema GLP-1, Obesity & Cardiometabolic ETF (HRTS).

Buy the current duopoly stocks - Novo Nordisk and Eli Lilly.
Invest in a large pharmaceutical company that has their sights set on the obesity market with drugs in development. Example companies include Amgen, which is developing an anti-body for obesity, or Roche, which recently acquired privately held Carmot entering the space.
Invest in a small or medium sized emerging biotechnology firms that are running clinical trials of novel approaches. These includes companies like Viking Therapeutics, Zealand Pharma and others. These stocks offer higher risk for potentially higher reward. It is wroth remembering that the failure rate in metabolic drugs from Phase I to approval is 85% i.e. identifying winners is challenging.
Look at stocks that benefit from the growth in GLP-1 and weight loss drugs indirectly.

The Future of Weight Loss Drugs

The future of weight loss drugs will focus on addressing some of the major issues with GLP-1s.

Supply and oral drugs - the difficulty of manufacturing GLP-1s could be addressed by a company demonstrating efficacy, and more importantly, safety of an oral non-peptide GLP-1. Many are trying including Eli Lilly (together with Chugai), Viking, Roche and others. Eli Lilly, for example, which is behind the drug Zepbound, shared this week that it’s already looking for approval for an oral version of its weight loss drug sometime next year. Novo Nordisk, behind Wegovy, is in the same race to innovate, with more user-friendly and effective versions of existing weight loss drugs.
Tolerability - though safe and taken by millions of people, GLP-1s still leave more to be desired from tolerability with troublesome gastrointestinal side effects. Several competitors, including the duopoly leader Novo Nordisk, are working on amylin, another incretin hormone, that could be more tolerable.
Efficacy - many companies, such as Eli Lilly or Zealand Pharma, are working on improving efficacy in terms of percentage weight loss or focussing on specific sub-niches, like liver diseases. Wegovy and Zepbound have set a high bar, showing 10-20% weight loss and a whole host of clinical benefits. Most important of these was Novo Nordisk demonstrating in a 17,000 patient five year clinical trial that Wegovy reduced the risk of major cardiovascular events (MACE) by 20%.
Muscle loss - GLP-1s are known to drop weight which does include muscle. Several companies, like Regeneron, are working on muscle-sparing (or even gaining) drugs to pair up with GLP-1s.

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