In the past few weeks, we’ve seen an outbreak of what can only be described as “novelty” exchange-traded funds (ETFs), as issuers – keen to make an impact on an industry dominated by active asset-management groups – try to create excitement by issuing “eye-catching” products, based on “sexy” ideas and themes. Many of these ETFs share a common approach: they’re often issued via “white-label” platforms, which allow the issuers to take a popular theme, turn it into an easy-to-buy index and ETF, then sell direct to market.
Back in April, for example, Canada-based ETF firm Horizons issued the Medical Marijuana Life Sciences ETF (Toronto: HMMJ). This index invests in listed pharmaceutical and life sciences firms (including London’s very own GW Pharmaceuticals), which are involved in the fast-expanding legitimate medical-marijuana business. I think this could be a brilliant idea, and the fund has already taken in more than C$100m. However, short-term performance in terms of net asset value has been a little underwhelming (it’s fallen from $10 to just over $8). The problem, as with all niche indices, is that it all boils down to the performance of the firms you’re investing in, and this is a particularly new, “hot” and therefore volatile sector.
Next up is the Quincy Jones Streaming Music, Media & Entertainment ETF, launching next month. This ETF tracks companies involved in every aspect of the streaming of entertainment online (everything from leisure stocks to telecoms groups). A glance at the prospectus reveals that prospective members must be listed on a US exchange, have a market capitalisation of at least $1.5bn, and a six-month average daily trading value of at least $5m.
But my own personal favourite novelty launch is the ProSports Sponsors ETF (US: FANZ). The ETF tracks an index of companies that sponsor professional football, baseball, hockey and basketball teams in the US, as well as media companies that broadcast these sports. FANZ is the first ETF to track this index, but it’s surely only a matter of time before we are being asked to gamble away our wealth on ETFs that track the net worth of top Premier League players and their clubs.
However, alongside these novelty launches, there are a few genuine diamonds in the rough – many in the “smart-beta” sector. The idea behind smart beta is to build a better index (one that hopefully beats a traditional, market-cap-weighted index over time) by screening stocks, using well-known measures that have worked in the past. Here in the UK, ETF provider Lyxor has just revealed a clutch of ETFs that could, I believe, join the core portfolio of any MoneyWeek reader. My favourite is the Lyxor FTSE UK Quality Low Vol Dividend UCITS ETF (LSE: DOSH), based on an index created by FTSE.
You can read more about the index at the FTSE website, but put simply, it tracks stocks that pay a high dividend yield, but that are also “high-quality” (so as to avoid “value traps” – stocks with high yields that then don’t end up paying the dividends). The stocks also display low volatility (when the market has ups and downs, they don’t fluctuate quite so much). I think that over time, DOSH could be a great substitute for a FTSE 100 tracker. If innovation means more ETFs like this, bring it on.
Activist watch
Activists Jana Partners and Trian Fund Management have joined Glenview Capital Management and Third Point to form a “quartet” ready “to pounce” on plans to break up DowDuPont, the $150bn chemicals giant that will be created by merging Dow Chemicals and DuPont, says David Benoit in The Wall Street Journal.
The plan was to merge the two, then split the new entity into three. But there is now disagreement on how to proceed. “The sole focus should be on creating the right number of spinoff entities and stocking them with the right assets to… create maximum long-term shareholder value, and not on empire-building or ego-massaging”, Jana founder Barry Rosenstein told The Wall Street Journal.
In the news…
Are you paying too much for your tracker? You can now track the FTSE 100 or FTSE All-Share for as little as 0.06% to 0.07% a year, says Aime Williams in the FT. Fund provider Janus Henderson on the other hand offers funds that do the same for as much as ten times that fee, while if you buy directly, fund manager Legal & General charges an even higher 0.85% for its FTSE All-Share tracker.
Other overpriced FTSE All-Share trackers are on offer from Virgin Money, Halifax, Columbia Threadneedle and Aviva Investors. Lloyds Banking Group, meanwhile, which owns Halifax and Scottish Widows, offers All-Share and FTSE 100 trackers priced at 1% or more, but says that this charging structure predated 2013 regulations that banned asset managers from paying commission to financial advisers. However, investors should now be able to move to a “clean” share class, which charges less.
So if you are invested in a tracker fund provided by one of the above asset managers, check the fee and sell out if you are paying too much. The cheapest option for the FTSE 100 is Vanguard’s FTSE 100 index tracker (0.06%), followed by BlackRock’s iShares FTSE 100 Ucits ETF, with an ongoing charge of just 0.07%. To track the FTSE All-Share, BlackRock’s iShares UK Equity tracker charges 0.06%, while the HSBC FTSE All-Share tracker charges 0.07%.