Real Reasons This New ETF's Success Is Credible

Among new exchange-traded funds, there are always winners and losers on asset gathering. Then there are outright legends. This year, that group includes the Global X Telemedicine & Digital Health ETF EDOC.

What Happened: EDOC is less than four months and is clearly benefiting from enthusiasm for thematic ETFs as highlighted by nearly $413 million in assets under management. That's enough to make EDOC one of this year's most successful rookie ETFs, thematic or otherwise.

EDOC, which follows the Solactive Telemedicine & Digital Health Index, is benefiting from the increasing adoption of digital health care/telemedicine, a transition hastened by the coronavirus pandemic.

Why It's Important: What's critical to note about EDOC is that like several other disruptive themes, telemedicine was growing before the pandemic. That says at least two important things about the EDOC thesis. First, there's growth to be had here. Second, the fund and its 40 components aren't going to suffer when COVID-19 is finally defeated.

Speaking of growth, RBC forecasts the digital health care market will balloon to $92 billion in 2025, meaning it will more than triple from $27 billion today. Big technology companies and venture investors will speed this growth.

“The cash balances at the big technology companies are now at record levels and record levels of private investment flowing into new start-ups has increased the capital targeting the digital adaptation,” notes RBC. “That should serve to accelerate the shift in healthcare while at the same time introducing a new class of healthcare tech companies to the market.”

Telemedicine's status as a disruptive theme is solidified by the fact that it's more cost-effective than many traditional treatment options and reduces waste and misdiagnoses. Those important factors that highlight positive long-term adoption trends for EDOC holdings.

What's Next: Not surprisingly, investors will pay up for the privilege of embracing digital health names. EDOC trades at 79.17x this year's earnings and 8.85x book value, according to issuer data. That's well in excess of the broader healthcare sector, which is now viewed as a value play. However, there's room for multiple expansion by EDOC components.

“Despite a traditionally higher tech valuation over healthcare, big tech companies have seen P/E expansion of >60% over the last two years and now an ~87% premium to healthcare which has remained flat — we believe the increasingly 'tech-like' attributes of these emerging healthcare companies could catalyze similar significant multiple expansion ahead,” notes RBC.