Niche medical ETFs may leave investors with ailing finances

Mar 27, 2006 @ 12:01 am

By David Hoffman

NEW YORK - Investors can't cure cancer themselves, but two proposed exchange traded funds would help them fund companies working to find a cure.

Each would follow an index of 20 companies involved in the fight against cancer.

The FW M-Cancer Index Fund and the FW T-Cancer Index Fund are in registration, but it is expected that they - and 10 more ETFs that focus on indexes that represent other health-care areas - will become available to investors later this year.

Mixed reaction

Some of the other ETFs in registration are the FW Derma and Wound Care Index Fund, the FW Diagnostics Index Fund, the FW Infectious Disease Index Fund, the FW Ophthalmology Index Fund and the FW Respiratory/Pulmonary Index Fund.

Reaction to the proposed funds - which would be advised by

Ferghana-WellSpring LLC of New York, a newly formed company - is mixed, especially among financial advisers.

Some advisers said that the funds might spur investors to act on their emotions rather than do what is in their best financial interests.

"My concern is, we're going to have a lot of people making an emotional play who might not know what they're getting into," said Tom Lydon, president of Global Trends Investments, a financial advisory firm in Newport Beach, Calif.

The ETFs are akin to socially conscious investing, and ETFs may not be the proper place to make such an investment, said Sean Sebold, president of Sebold Capital Management Inc. of Naperville, Ill. "If you want to give money away, give it to the [Memorial] Sloan-Kettering Cancer Center [of New York]," he said.

As long as investors know the risks, however, there might be value in the planned ETFs, said Marvin Appel, chief executive of Appel Asset Management Corp. in Great Neck, N.Y. "Investors have a right to feel good about what they're investing in," he said.

The risks of such narrowly focused ETFs, however, can be great, said Greg Werlinich, president of Werlinich Asset Management LLC of Valhalla, N.Y. Apart from the inherent risk involved in investing in such ETFs, it is unknown whether there would be enough liquidity for investors to take advantage of them substantially, he said.

ETFs are a really good way to "slice and dice the market," but the proposed ETFs may be trying to slice it a little too thin, Mr. Werlinich said.

Another potential issue is that Ferghana-WellSpring is a new ETF provider, Mr. Lydon said. As a result, he would like to see the ETFs in operation for a little while to make sure there are no surprises.

Ferghana-WellSpring does have a template to follow for the creation of its ETFs. Jeffrey Feldman, the company's chief executive, was a partner with the now-defunct Philadelphia-based WellSpring BioCapital Partners LLC.

In 2004, the company developed five unit investment trusts called Vertical Investments of Life Sciences Trusts.

Each has a portfolio of 12 to 20 stocks of life-science, biotechnology, pharmaceutical and related companies that are trying to find cures and treatments for Alzheimer's disease, diabetes and rheumatoid arthritis, as well as breast, prostate and ovarian cancer.

But the VOLTs - pronounced "violets" - which were sponsored by First Trust Portfolios LP in Lisle, Ill., and which still are available in the secondary market, never really caught on with investors, Mr. Feldman said. Only about $10 million worth were ever sold, he said.

Two factors work against VOLTs, Mr. Feldman said: First Trust never really put much of a marketing effort behind them, and they carry a hefty sales charge of 4.95%.

Advisers tend to shy away from UITs, as they are niche products that don't offer the flexibility of mutual funds or ETFs.

ETFs, however, provide the perfect vehicle for investments in very specific segments of the health-care industry, Mr. Feldman said.

That is where Ferghana Partners Inc. of New York, a provider of financial advice to life-science companies, comes in.

Ferghana has the expertise in the health-care industry to develop the indexes that the proposed ETFs from Ferghana-WellSpring will follow, said William J. Kridel Jr., a managing director with Ferghana Partners and chairman of the newly formed ETF provider.

Because its ETFs still are in registration, he declined to provide many details on how the indexes would be constructed.

Mr. Kridel did say, however, that each index would contain 20 stocks. The indexes wouldn't include "tiny, tiny" companies and would exclude "giant" companies, he added.

Standard & Poor's of New York would administer the indexes, and an index committee would meet quarterly to determine if the index needed to be restructured, Mr. Kridel said. The planned ETFs would be an improvement over current health-care ETFs and mutual funds, because they would give investors a "fairly precise tool" to zero in on those segments of the health-care market in which they would want to invest, he said.

They would also be cost efficient, Mr. Kridel said, with an expense ratio of well below 1%. The average ETF's expense ratio at the end of last month stood at 0.44%, according to Morningstar Inc. of Chicago.

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