New exchange-traded funds are launched everyday—381 debuted globally in 2016, according to research firm ETFGI—but after the initial excitement and flurry of interest that accompanies new entrants, it’s easy for them to disappear into the crowd, a crowd comprised of the 4,872 other funds available for investors.
While a few break out and become favorites for investors and traders, as the medical marijuana fund seems to have, many get lost in the shuffle, with attention dissipating before they amass a record that can be fairly evaluated.
With that in mind, here are three very different funds that celebrated their first anniversary this week, with a look at how they have traded and performed over that period.
Fund: The Amplify Online Retail ETF
Assets under management: $12 million
Expense Ratio: 0.65%
Launch date: April 20, 2016
30-day average volume: 5,400 (approximately)
12-month price move: up 20.5%
Benchmark performance (past 12 months): SPDR S&P Retail ETF
down 5.1%, S&P 500
Top five holdings: Nutrisystem Inc.
Lands’ End Inc.
Strategy: The fund only invests in companies that get 70% of their revenue from online sales, as part of a bet on the broader consumer shift from traditional retail to web- and mobile-based shopping.
The result: So far this has proved to be a canny strategy, as measured by the dramatic divergence in performance between the fund and a broader retail ETF. While the Online Retail ETF is up more than 20% over the past 12 months, the SPDR S&P Retail ETF is down more than 5% over the same period, hurt by extended and broad-based weakness among brick-and-mortar stores.
Online sales are a small but growing part of the consumer market. According to a February report by the Commerce Department, U.S. retail e-commerce sales rose 32% in the fourth quarter (unadjusted), more than eight times the growth rate of total retail sales, which were up 3.9%. E-commerce sales accounted for 9.5% of total sales in the quarter, on an adjusted basis, up from 8.7% in the third quarter of 2015.
“The outlook for online retail is much different than the one for brick and mortar,” said Christian Magoon, chief executive officer of Amplify ETFs. “We wanted to provide a product that had little overlap with traditional brick and mortar offerings, to show that there’s an advantage to a fund with a tilt to online retail rather than traditional. Over the past year, it’s worked: not only has the performance been different, but online retail has benefited to the upside.”
Fund: Global X S&P 500 Catholic Values ETF
Assets under management: $89.9 million
Expense Ratio: 0.29%
Launch date: April 18, 2016
30-day average volume: 15,000 (approximately)
12-month price move: up 13.9%
Benchmark performance (past 12 months): S&P 500
Top five holdings: Apple Inc.
Exxon Mobil Corp.
Strategy: The fund screens the S&P 500 through the guidelines of the United States Conference of Catholic Bishops, eliminating companies that they deem violate Catholic principles, such as weapon makers or companies that produce adult entertainment. Unlike other religious ETFs, it doesn’t eliminate companies that donate to Planned Parenthood or support same-sex marriage. According to FactSet, it currently holds 462 companies, meaning 38 the S&P’s 500 components were excluded.
The result: The fund has performed better than the S&P 500 over the past year, which Jay Jacobs, Global X’s director of research, said was “noise.”
“This isn’t an alpha-generating fund,” he said, referring to outperformance over a benchmark. “We’re just trying to get S&P-like exposure, just with a Catholic values overlay. Over the past year it has behaved very similarly to the S&P, which is the goal.”
The Catholic Values ETF is part of the “ESG” trend of investing, which refers to environmental, social and governance issues, a trio of ethical concerns that fund managers can build portfolios to avoid exposure to. So-called “moral investing” is a way for individuals to participate in the market without indirectly supporting companies that don’t match their belief system. “It should be very easy for people with religious values to plus the fund into their portfolio and get exposure to the market without going through and evaluating each company individually,” Jacobs said.
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As Jacobs notes, these funds are not designed to pursue high-growth areas of the market or other specific strategies. “The restrictions mean that we’re going to be underweight some sectors, and if those perform well for some reason, that could be a source of underperformance for us. But there will also be times when those perform badly. Over the long-term, we really don’t expect a meaningful difference with the S&P.”
Fund: Buzz US Sentiment Leaders ETF
Assets under management: $9.4 million
Expense Ratio: 0.75%
Launch date: April 19, 2016
30-day average volume: 1,900 (approximately)
12-month price move: up 4.9%
Benchmark performance (past 12 months): S&P 500
Top five holdings: Tesla Inc.
Walt Disney Co.
Strategy: The fund mines online data related to stocks—including social media chatter, as well as investment talk on blogs and comment boards—and analyzes it for what it calls “social momentum,” or a forward-looking measure of sentiment. The idea is that if huge masses of people share their trading activity—not only the names they’re buying and selling, but also the price levels they’re looking out for and other more technical details of their strategies—that can point to which stocks are likely to outperform.
The result: The fund has sharply underperformed the broader market over the past year, with a gain that’s less than half the rise of the S&P 500. Jamie Wise, founder of Buzz Indexes, admitted that “we’re still finding our way in the ETF marketplace.”
The Sentiment Leaders ETF has undergone some major changes in its first year, including tripling the number of stocks held in the portfolio, to 75 from 25, and a new name that followed a break from Sprott Asset Management, which had been its original sponsor. (Before March 31, the fund had been called the Sprott Buzz Social Media Insights ETF.)
“There were no resources or sales dedicated to the product, and even if you have a fund that performs well, you need general awareness and people supporting it, otherwise it will have a hard time finding assets,” Wise said of the break with Sprott. “We realized it was in everyone’s best interest for us to separate and for us to focus on the product ourselves.”
Wise expressed confidence in the fund’s underlying concept, saying that “performance-wise, it has performed to our expectations.” He noted that the “social momentum” metrics had identified components like Nvidia
and Advanced Micro Devices
before rises in the stocks.
“We were the first to market with a concept that’s new to retail audiences, if not institutional ones, which have long been using artificial intelligence applications to harvest insights from online data sets.” Changes weren’t made to the underlying strategy over the past year, but Wise said that “our algos [algorithms] will get better and smarter with time, and we’re confident that performance will reflect that.”
Wise is correct that institutions have incorporated similar quantitative analysis; BlackRock recently announced that it would expand the size of its U.S. quant team.
The Buzz fund only holds large-cap U.S. stocks, which it defines as one with a market cap above $5 billion. That could limit its broader acceptance among investors, as there are more widely traded ETFs that offer similar exposure for much lower fees. The iShares S&P 100 ETF
which also focuses on megacap names, has an expense ratio of 0.2%, nearly a fourth of Buzz’s 0.75% fee.
“We’re the next generation of active manager, and for half the fee of the last generation of advisers, you can have access to the next generation of analytics,” Wise said.
Active managers individually select the components of a portfolio, in contrast to passive managers, who simply track an index like the S&P 500. Not only are passive funds cheaper than active ones, but data have repeatedly shown that almost no active funds can consistently outperform the market for long stretches of time.
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