Blockchain, vegans and FOMO: the weird and wonderful world of thematic ETFs

Investors in 2021 who wish to gain access to a certain sector or a trend – or even a feeling – have their picks of a dizzying array of exchange-traded funds these days.

Blue-sky thinking has taken passive investing from the market-following world of index trackers to the new dawn of thematic ETFs, which took off in a big way last year.

From electric cars to space, from cloud technology to blockchain, from veganism and LBGTQ alignment to innovation, and almost mind-bending fund ideas based on ‘buzz’ and the fear of missing out (FOMO), investors who don’t want to keep track of individual stocks can find almost an ETF for pretty much anything.

But as many wise heads in the market note, investors need to approach some of the more esoteric options with caution. 

Looking at one of these in particular, the FOMO ETF was launched this week by Tuttle Capital Management with the aim of providing exposure to the most popular assets of the time.

Tuttle also launched the Fat Tail Risk ETF (FATT), which is designed to protect investors from major market downturns.

“Markets move faster than ever before, and the Covid crisis showed us that bear markets can happen over months now instead of years,” says boss Matthew Tuttle.

“Traditional investments can’t be relied upon to protect from the next market decline, and traditional tail risk strategies cost too much during bull markets.

“FATT is designed to be able to make money during bull markets while still being able to make money during major market declines. Of course, there is no assurance that this will be successful.”

The FOMO focus is on company equities but the portfolio can also include special purpose acquisition companies (SPACs), and other ETFs and cryptocurrencies, while FATT is focused on cash, treasuries and ETFs that follow those securities, together with volatility and inverse volatility ETFs.

Both ETFs are actively managed, so do not track a pre-defined index.

This is not that rare nowadays, having been made famous perhaps by Cathie Wood’s approach with her ARK range of ETFs, including the ARK Innovation ETF, which was one of the best performing in the world last year, helped by big bets on Tesla and bitcoin.

Last month, Procure, known for its space ETF, launched the LGBTQ+ ESG100 ETF (NASDAQ:LGBT), tracking an index that identifies “the top 100 corporations that most align with the LGBTQ community across America”.

This seems a tough metric to measure precisely - though this is not something that may put off seasoned ETF investors, with several funds available on the market that sound like they have a large degree of subjectivity in the portfolio.

Along with FOMO, possibly the other most extreme launch recently was the 'buzz' ETF, officially known as the VanEck Vectors Social Sentiment ETF, and invests in US large-cap equities based on fast moving social media sentiment.

This ETF seeks to track the performance of the top 75 most talked-about stocks companies on the internet, which it will do by tracking the BUZZ NextGen AI US Sentiment Leaders Index, which consists of the most-favourably talked about stocks online, whether on blogs, social media or forums such as Reddit.

These three ETFs are not currently available to UK investors, notes Myron Jobson, personal finance campaigner at Interactive Investor.

“While there’s no shortage of mainstream ETFs that can help investors cheaply build a portfolio that tracks the world’s markets, there’s also no shortage of weird and wonderful investment strategies out there.

“Some of the strategies are outlandish, and while they may sound interesting superficially, if investors fail to understand how it is invested and the high risks, they could end up losing a lot of money. The rise of blockchain is a case in point. It pays to research these products before taking the plunge and injecting capital into them – but there’s no question that the ETF sector has seen a lot of innovation and some intriguing propositions, from the quirky through to potential future megatrends.”

There are a range of cryptocurrency-related ETFs out there too, even for old-school investors who like to follow the age-old advice of the legendary Warren Buffet.

There are ETFs based around Buffett’s idea of companies with a “moat”, referring businesses with a long-term sustainable competitive advantage that protects their market share and profit from rivals. 

“Rather than trying to work out which companies actually have a moat, however, there are two ETFs track an index of companies deemed to,” says Bailey.

The VanEck Vectors Morningstar Global Wide Moat ETF tracks the Morningstar Global Wide Moat Focus Index, for an ongoing charge of 0.52%. Year-to-date it has returned 8.29%

There is also the VanEck Vectors Morningstar US Wide Moat ETF, which tracks an index composed of US companies with strong moats and attractive valuations. It is slightly cheaper than the global version, charging 0.49%, and in the year to date has returned 13.7%.

One of the most popular is the Invesco Elwood Global Blockchain ETF, with the fund offering a mix of exposure to both companies involved directly in bitcoin and cryptocurrency mining and trading alongside more conventional companies deemed to be making use of blockchain technology.

Year-to-date it has returned 26.7%.

“But don’t let that turn your head,” says Tom Bailey, Interactive Investor’s ETF specialist, “this product is not for the faint hearted and should only every be a tiny amount of a balanced portfolio. It has an ongoing charge of 0.65%.

There is also another blockchain ETF, the First Trust Indxx Innovative Transaction & Process UCITS ETF, which has returned 8.9% in the year to date. It has an ongoing charge of 0.65%.

“This ETF is much less racy than the Invesco one due to not having any cryptocurrency pure plays. Instead, it tracks an index of companies that have made a ‘material investment’ in blockchain technology.”

Another hot sector from 2020 and into 2021 is video games, with worldwide PC gaming revenues totalling almost US$37bn last year, while the mobile gaming market generated an estimated revenue above US$77bn.

For anyone looking to get in on this growing and increasingly profitable industry, there are two ETF options, Bailey suggests, the VanEck Vector Video Gaming & eSports ETF and the Global X Video Games & Esports ETF.

The VanEck ETF tracks the MVIS Global Video Gaming eSports Index, composed of 25 stocks, for 0.55%. Year-to-date it has returned -3.2%.

The Global X ETF tracks the Solactive Video Games & Esports V2 Index, composed of 40 stocks, costing 0.5%. Year-to-date it has returned -0.2%

An even bigger structural shift has been taking place in retail, as shoppers move from bricks-and-mortar retail to online shopping.

ETF investors have two choices to access this theme: the Global Online Retail ETF, which has an ongoing charge of 0.69% and builds it portfolio by giving each company in the index an initial weight according to its year-over-year quarterly revenue growth percentage.

“This means that companies with better revenue growth receive a greater weighting. As a result, the world’s largest e-commerce companies, such as Amazon, do not automatically have a huge weighting,” says Bailey.

“Instead, the top holdings are often lesser-known companies. For example, one of its biggest holdings currently is Poshmark, a second-hand market place.”

The ETF has lost 5.6% since its launch in April.

With China and some other emerging markets providing the backdrop for all sorts of digital innovation, some investors might like the sound of the EMQQ Emerging Makts Internet & Ecommerce ETF, one of the HANetf stable and which provides exposure to leading internet and ecommerce companies serving emerging markets.

“This ETF is a play on both the tech transformation of emerging markets and the expected growth of middle-class consumption in these countries,” says Bailey.

It has a charge of 0.8%. Year-to-date it has returned -6.9%.

Finally, with the price of timber, or lumber as it’s called in the US, soaring in recent month due to a surge in demand for houses and renovations, while bottlenecks hold back supply, some investors have started to look for ETFs to tap into this theme.

One way to play this theme has been the iShares Global Timber&Forestry ETF.For 0.65%, this ETF tracks the S&P Global Timber & Forestry Index, which is comprised of the 25 largest publicly traded companies engaged in the “ownership, management or the upstream supply chain of forests and timberlands”. Year to date it has returned 9.9%.


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