Choice. It’s something most clients want and many financial advisors would like to offer. ETF firms are providing an almost unprecedented array of funds to expand the options available to clients. From those that focus on revolutionary robotics technology to self-driving cars to marijuana stocks, investors have never had so much choice.
“There’s an appetite for much narrower types of products,” says Dave Nadig, CEO of etf.com, an independent ETF research firm. These ETFs offer a convenient and lower risk way to invest in niche market sectors, he notes, compared with single stock investments that are subject to what he calls “blow-up” risk.
However, Nadig also cautions that, no matter the format, investments in many of these newer ETFs constitutes higher-risk investing, as many of these ETFs track only a handful of stocks in potentially volatile industries. So, like any type of bet, clients need to be aware that the potential for enormous gains is mixed with that of steep losses.
“These niche industries are generally in the earlier stages of the business cycle,” points out David Kletz, vice president and portfolio manager with Kelowna, B.C.-based Forstrong Global Asset Management Inc. “They have less access to capital and tend to be less liquid than their more established peers.”
Still, there’s a place for niche ETFs in clients’ portfolios, Kletz says: “The disruptive nature of niche industries provides for significant growth potential. They are particularly appealing to more aggressive investors with a long time horizon looking to increase upside potential. Thematic ETFs with well-constructed indices provide a major diversification benefit.”
Here is a selection of ETFs that capitalize on new investing themes and trends:
> Evolve Cyber Security Index ETF (CYBR: TSX)
Evolve Cyber Security Index ETF, launched in September 2017 by Toronto-based Evolve Funds Group Inc., invests in global companies involved in developing products that help companies safeguard their data from cyberattacks. The C$ hedged ETF seeks to replicate the performance of the Solactive global cybersecurity index, developed by Germany-based Solactive. Kletz notes that, following “numerous high-profile hacks, large companies and governments worldwide have been forced to take Internet security seriously and materially expand personnel and budget spending to defend themselves.”
> Horizons Robotics and Automation Index ETF (ROBO: TSX)
Horizons Robotics and Automation Index ETF, which Toronto-based Horizons ETFs (Management) Canada Inc. launched in November 2017, invests in global companies and seeks to replicate the Dallas-based Global Robotics & Artificial Intelligence Thematic index. Among the C$ hedged ETF’s holdings are firms engaged in 3D printing, artificial intelligence (AI) and machine learning. “Robotics provide a much-needed offset to the aging demographics and declining productivity prevalent in most major economies worldwide,” Kletz says.
> ALPS Disruptive Technologies ETF (DTEC: CBOE BZX)
Launched in December 2017 by Colorado-based ALPS Holdings Inc., ALPS Disruptive Technologies ETF provides diversified exposure to 10 disruptive themes: health-care innovation; the “Internet of things”; clean energy and smart grid; cloud computing; data and analytics; fintech; robotics and AI; cybersecurity; 3D printing; and mobile payments. Holdings are weighted equally among 100 stocks, with approximately one-third of the underlying holdings from outside North America. The ETF tracks global companies that enter traditional markets with new digital forms of production and distribution, with the goal of disrupting an existing market.
> Amplify Transformational Data Sharing ETF (BLOK: NYSE Arca)
Introduced this past January by Illinois-based Amplify Investments LLC, Amplify Transformational Data Sharing ETF invests in a basket of publicly-traded global companies leading the research, investment and revenue creation related to blockchain-based and other distributed-ledger technologies. This fast-moving foundational technology is expected to pave the way for significant disruptions across many industries. The ETF is actively managed, allowing its portfolio managers to respond in real time to valuations, company fundamentals and announcements that may impact the blockchain marketplace.
> Horizons Medical Marijuana Life Sciences ETF (HMMJ: TSX)
Labeled as the first marijuana ETF in the world, Horizons Medical Marijuana Life Sciences ETF was launched in April 2017. This ETF seeks to replicate the performance of Solactive’s North American medical marijuana index. The index provides exposure to the performance of a basket of North American publicly listed life sciences companies and other firms with significant business activities in the marijuana industry. These firms focus on biopharmaceuticals, medical manufacturing, distribution, bio-products and other ancillary businesses related to the marijuana industry.
> AI Powered Equity ETF (AIEQ: NYSE Arca)
Launched in October 2017, by New Jersey-based ETF Managers Group LLC, AI Powered Equity ETF uses proprietary quantitative models, combined with IBM Watson artificial intelligence, to select securities for its portfolio. Named after IBM’s founder, Watson is an IBM supercomputer that combines AI and sophisticated analytical software for optimal performance. The ETF holds a portfolio of 30-70 companies, selected by the AI system for their lower risk and capital appreciation. The underlying technology analyzes information for approximately 6,000 U.S.-listed equities constantly, including company management and market sentiment, and processes more than one million regulatory filings, quarterly results releases, news articles and social media posts every day.
> Brand Leaders Plus Income ETF (HBF/HBF.U: TSX)
Originally launched as a closed-end fund in 2014 by Oakville, Ont.-based Harvest Portfolios Group Inc., this fund was converted to an ETF in late 2016. It focuses on major U.S. firms that are household names and includes 20 leading brands from several different sectors. Each firm has at least $10 billion in market capitalization at the time of investing. The portfolio is rebalanced quarterly so that each firm is weighted equally. Its investing goals are to provide monthly cash flow, capital appreciation and lower volatility than would be experienced by directly owning the securities of these brand leaders.
> Evolve Automobile Innovation Index ETF (CARS: TSX)
Launched in September 2017, the passively managed Evolve Automobile Innovation Index ETF seeks to replicate the performance of the Solactive future cars index. The ETF invests primarily in equities of companies that are directly or indirectly involved in developing electric vehicles, autonomous driving or network connected services for automobiles. The ETF is premised on the assumption that innovation will transform the automobile industry within the next decade.