While money has been flooding into infrastructure and real-estate funds recently (as I noted two weeks ago) another type of listed fund is also now experiencing a fundraising boom: exchange-traded funds (ETFs). They are mostly thematic funds containing a small basket of stocks, in some cases fewer than 50. By contrast, most previous ETFs have been broader index trackers. The new ones are therefore riskier than buying a wide portfolio of companies.
From industrials to bitcoin
The most straightforward new ETF is Global X’s US Infrastructure Development UCITS ETF (LSE: PAVE). It holds 99 companies set to benefit from increasing infrastructure activity in the US, driven by President Biden’s $1.2trn Infrastructure Investment and Jobs Act. Top holdings include Nucor, Eaton Corp, Kansas City Southern, and Vulcan Materials. Over 70% of the stocks in the fund are in the industrials sector, while materials and mining businesses make up the second-largest category of stocks.
Rize’s Digital Payments Economy UCITS ETF (LSE: PMNT) focuses on the rise of fintech-payment platforms. It tracks the Foxberry Euromonitor Digital Payments Economy USD Net Total Return index, which comprises over 60 companies developing novel payment solutions, such as Mastercard, Visa, American Express and Paypal, as well as digital-money players Coinbase Global and Voyager Digital. It’s a fascinating sector, and payments processors are the hot ticket in fintech at present. Note, however, that valuations – even for the blue-chip players – are looking stretched.
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HanETF’s latest launch, ETC Group Digital Assets & Blockchain Equity UCITS (LSE: KOIN), tracks an index with around 30 stocks involved in blockchain-based securitisation and payments, digital asset-mining companies, exchanges, non-fungible tokens (NFTs) and stablecoins. Top holdings are likely to be Marathon Digital, which focuses on asset mining (the process whereby digital assets such as bitcoin are minted and released into circulation), Coinbase (a cryptocurrency exchange), Galaxy Digital (a blockchain specialist), and Riot Blockchain.
The top five holdings will probably comprise around 50% of the fund. It is based on the Solactive ETC Group Digital Assets and Blockchain Equity index and each stock is capped at 10% of the index. Other existing ETFs within this niche (Invesco’s Elwood Global Blockchain UCITS ETF, VanEck Vectors’ Digital Assets Equity UCITS ETF, and the Melanion BTC Equities Universe UCITS ETF) all charge over 0.65% in fees, while the KOIN ETF charges 0.6%. It’s cheaper but also more of a pure-play digital assets fund; some of the rival funds hold bigger, less focused technology outfits like Intel or chip giant TSMC.
Amazon’s Alexa-inspired ETF
Most of us have probably dabbled with Amazon or Google smart-home devices, but these are just the tip of the iceberg of home-automation innovation, a fast-growing segment. VanEck Vectors Smart Home Active UCITS ETF (LSE: CAVE) is designed to cash in on this trend.
It differs from the ETFs mentioned so far because it is actively managed. Until now, virtually all ETFs have involved passively tracking an index. An active ETF looks and feels like a cross between an index-tracking fund and an investment trust: there is an “index” comprising a portfolio of 60 companies that generate their revenue or maintain assets in the “smart home ecosystem”, but there is also an active manager (Dutch investment boutique Dasym) that selects and changes the companies in that index on a monthly basis. I expect to see a great many more of these actively managed ETFs in the next few years, blurring the boundary between ETFs and investment trusts.
David Stevenson has been writing the Financial Times Adventurous Investor column for nearly 15 years and is also a regular columnist for Citywire.
He writes his own widely read Adventurous Investor SubStack newsletter at davidstevenson.substack.com
David has also had a successful career as a media entrepreneur setting up the big European fintech news and event outfit www.altfi.com as well as www.etfstream.com in the asset management space.
Before that, he was a founding partner in the Rocket Science Group, a successful corporate comms business.
David has also written a number of books on investing, funds, ETFs, and stock picking and is currently a non-executive director on a number of stockmarket-listed funds including Gresham House Energy Storage and the Aurora Investment Trust.
In what remains of his spare time he is a presiding justice on the Southampton magistrates bench.
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