This analysis is by Bloomberg Intelligence senior analysts Eric Balchunas and Athanasios Psarofagis. It appeared first on the Bloomberg Terminal.

The hunt for a COVID-19 vaccine is fueling early gains for a new theme exchange-traded fund, GERM, which has higher allocations to companies such as Inovio, Novavax and Moderna than any other ETF. A similar-sounding ETF isn’t getting the same boost, highlighting the importance of due diligence in the increasingly popular thematic category.

GERM’s all-in design pays off immediately

The ETFMG Treatments Testing and Advancements ETF (GERM) was up 13% in its first two weeks, offering a reminder of how crucial index design is for theme ETFs. GERM is highly focused, going all-in on biotech names that aim to treat and prevent viruses, including some companies pursuing a COVID-19 vaccine. Inovio and Novavax are responsible for about half of the ETF’s gain. No ETF has a bigger weighting to either company.

The early performance highlights the difference between a “pure-play” thematic ETF such as GERM and the broader approach of another new launch, the Pacer Biothreat ETF (VIRS). The latter includes only large-cap stocks — many of which aren’t involved in vaccine development.

Biggest contributors to GERM’s start

Netflix in biothreat ETF a pitch to advisers

The Pacer Bio Threat ETF (VIRS), despite the name, is much broader than GERM, with mainstream holdings such as Wal-Mart,, Netflix and Lowe’s, alongside more targeted stocks, including Abbott Laboratories and Sanofi, a maker of hydroxychloroquine. The portfolio may be overly broad for the theme, in our view, but the ETF is likely targeted at advisers. They tend to prefer ETFs stuffed with big-cap stocks, so the fund moves much like the market, avoiding the need to explain potential performance gaps to clients.

GERM has much more small-cap exposure and tracking error to