Story written by Evelyn Cheng at CNBC
The ETF industry is betting that investors want to link more of their investing dollars to social trends, or business and technologies, not yet reflected in traditional sector funds.
Called “innovative” or “socially responsible” trends in the industry, more than 10 percent of the 200-plus exchange-traded funds launched in 2016 were directed at emerging technologies like mobile pay or the building consumer interest in organic farming.
That’s according to fund data from ETF.com analyzed by CNBC. In 2015, only about five new ETFs contained in the list were thematic.
“With the style and sector ETF market increasingly concentrated, ETF providers have launched narrower strategies that can complement the more established sector products,” Todd Rosenbluth, director of ETF and mutual fund research at CFRA, said in an email.
“Socially responsible mutual funds have been popular for years, but ETF providers are hoping a younger generation of investors will want lower-cost index-based alternatives,” he said.
In the last few years firms like PureFunds launched ETFs that track new business opportunities such as those in cybersecurity (HACK). This year, Janus Capital launched The Organics ETF (ORG) and PureFunds launched the Drone Economy Strategy ETF (IFLY), Video Game ETF (GAMR), Solactive FinTech (FINQ) and HealthTech ETF (IMED).
2016 also saw the launch of Global X S&P 500 Catholic Values ETF (CATH), Spirited Funds/ETFMG Whiskey & Spirits ETF (WSKY) and the Oppenheimer Global ESG Revenue ETF (ESGF), or putting money into companies with strong track records on the environment, social issues and corporate governance.
“Many investors are using ETFs to get exposure to areas that might have been difficult to access prior to the ETFs'” existence, said Andrew Chanin, CEO of PureFunds.
ETFs have already grown in popularity for their low fees, and it looks like the industry is searching for new ways to attract business. Rather than paying an active manager to gather a group of thematic stocks together into a mutual fund, ETFs let investors invest in a basket of stocks for often a fraction of the cost.
Traditional fund groups include biotech stocks (iShares Nasdaq Biotechnology ETF IBB) and the financials sector (XLF). ETFs have also allowed investors to take advantage of tactics used by hedge funds, such as hedging against currency changes in international holdings (iShares Currency Hedged MSCI Emerging Markets HEEM).
Now, the strategies offered are becoming even more nuanced.
And just because a stock is in a “disruptive” fund, it doesn’t have to be a hot start-up. In fact, the PureFunds mobile pay ETF (IPAY)’s top holdings are Visa, MasterCard and American Express.
“They’ve all made steps to be actual players in the mobile digital space. If they see any technologies they like (to) acquire or build up, they are certainly not going to wait and let other people take away their piece of the (transition) pie,” Chanin said.
FINQ’s top holdings include Ellie Mae, IHS Markit, Broadridge Financial Solutions as well as Square.
That said, strategies that try to play off changing consumer interests and technological changes have not actually given investors better returns than the broad S&P 500 this year.
PureFunds’ FINQ is down 6.1 percent for the quarter while the S&P is up 4.7 percent over that time. IPAY is up nearly 5 percent year to date while the S&P is up 11 percent for the same period.
Financials and manufacturing-focused names have climbed on hopes of greater economic growth after the surprise election win of President-elect Donald Trump. Internationally focused sectors such as technology have generally lagged as investors expect more protectionist trade policies to boost the U.S. dollar and weigh on multinationals.
Disruptive investing strategies “are, in my view, all meant to be long-term investments. This time should be focused with a five-year, 10-year, 20-year outlook,” said Ric Edelman, chairman and CEO of Edelman Financial Services, and author of the forthcoming investing book “The Truth about Your Future.”
“It’s too new an arena to expect a short-term return. On the other hand it’s too important an area to ignore for a long-term portfolio,” Edelman said.
In March 2015, his firm launched the iShares Exponential Technologies ETF (XT). Top holdings include Indian technology consulting firm Wipro, Tokyo Electron, chipmaker Nvidia and electric carmaker Tesla Motors.
The ETF is up 9 percent year to date, versus an 11 percent gain for the S&P 500.
Posted by: The Trust Advisor