Thursday, May 7, 2015

New-to-Market: XT

New-to-Market - This blog series highlights ETFs that have recently gone public and reflect those strategies currently most in demand by investors.  While ETFs are not eligible for ETFG Risk Ratings until traded for 3 months and ETFG Reward Ratings for 12 months, our goal is to highlight the most cutting-edge investment strategies that have recently embraced the ETF structure – we hope you enjoy this special series of posts.

At long last, there’s an ETF that feeds your addiction for companies on the cutting edge of technological breakthroughs that doesn’t require you to commit to a specific sector, market cap or even country the iShares Exponential Technologies ETF (XT.)  If you’re like us and your first instinct when you get a new shiny gadget is to play with it before reading the manual, stop and settle in for our latest “New-to-Market” post where we’ll explore what makes XT so unique and test whether this fund will truly help you live on the edge.

What helps XT stand out from the crowd of thematic funds is that the fund isn’t investing in one specific trend, say electric vehicles or privately-funded space flights.  Instead the funds benchmark, the Morningstar Exponential Technologies Index, utilizes nine different themes they feel offer investors exposure to the most likely drivers for future economic growth.  Think about the productivity revolution that was unleased by the advent of the personal computer and the exponential (had to get that in here somehow) earnings growth companies like Microsoft experienced.  And while networks/computer systems and big data are two of the theme’s the fund pursues, it also includes companies at the leading edge of breakthroughs in bioinformatics, 3D printing, nanotechnology, and alternative energy systems.  Morningstar ranks every stock currently covered by their analysts based on their exposure to each of the themes and then selects “leaders” in each field for inclusion in the benchmark with preference for inclusion given to stocks that score highly across multiple themes and discards any stocks with a market cap of less than $300 million or less than $2 million in average daily volume.

The net result is a portfolio of 200 equally weighted stocks offering exposure to some of the best known trend setters with another positive feature in that Morningstar has gone global in their search for best ideas, with the fund having only 66% of its positions in the U.S.  But before you open your wallet, consider the portfolio construction process and how it might put you at a disadvantage.  First, you’re only buying stocks covered by Morningstar’s analyst teams and how many big research firms cover small-cap stocks or recent IPO’s?  While there are a number of smaller names among their current positions (looking at you Portugal Telecom), the bulk of the equity exposure comes from giant and large cap names although the funds average market cap is close to $22.6 billion compared to $88.02 billion for the Technology Sector Select SPDR (XLK.)  So if you’re looking for newly-listed companies with a first mover advantage, this might not be the fund for you.  Another feature of sticking with established companies trying to exploit new technologies is that stocks you might not think of as on the ‘cutting edge’ will be in the portfolio.  For example, Portugal Telecom isn’t the only telecom stock on the list with the largest single telecom position being held by Mobile Telesystems ADS followed by T-Mobile.  In fact, telecom is the fourth largest sector weighting at slightly more than 10% of the portfolio!

And while you might be worried about how telecoms might drag on the performance, it certainly hasn’t held the fund back in its short life so far.  Down .62% since its inception on March 19th and slightly underperforming XLK and the S&P 500 (-.37% and -.44% respectively), the fund has showed the merits of a more balanced and equally weighted approach since the broader equity market began turning on April 28th.  While the fund is still down 1.58% since then, it compares favorably to the 2.64% loss of XLK and is only 18 bps worse than the broader market.  What’s been keeping the fund out of the worst of the action?  Partly those telecom positions where Mobile Telesystems is up 1.66% since the fund’s inception but searching out innovative companies across all sector classes has paid off with healthcare names making a strong contribution over the last few days.  Seattle Genetics (SGEN) beat analysts’ expectations  on rising revenue and is up over 6.27% in the last five days while fellow biotech stock BioMarin Pharmaceutical (BMRN) is doing its part for the cause by rising nearly 4% in that time frame.  Does that mean XT is just a stealth biotech fund?  XT is outperforming the iShares NASDAQ Biotechnology ETF (IBB) since the 28th and the idea of theme leaders is partly responsible.  The two funds share a nearly identical weighting towards smaller stocks like SGEN while XT avoids the heavily concentrated exposure in names like Celgene that has weighed down IBB.

So for those investors looking for a way to play global themes without wagering all their chips on a microcap name like Plug Power, the iShares Exponential Technologies ETF might be worth keeping on your radar.

Thank you for reading ETF Global Perspectives!

*Please note that ETFs are eligible for ETFG Red Diamond Risk Ratings following 3 months of trading and ETFG Green Diamond Reward Ratings following 12 months of trading.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.

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