New crop of ETFs offer creative investing ideas for volatile times
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Given how incredibly volatile markets have been during the past few months, it probably won’t come as a surprise that fund managers haven’t been racing to introduce new funds.
However, that hasn’t stopped some useful new ideas from emerging, especially in the world of exchange traded funds, or ETFs. Some of these new funds might even make a lot of sense, given that markets are likely to remain volatile for some time.
Let’s start with gold. I’ve found myself quietly building up a small holding in the precious metal via US gold equities. I’ve been thinking about adding to that with some less racy funds that invest in physical gold holdings, but I’ve held back for a number of reasons — not least that I’m ever so slightly worried about the effect of volatile foreign exchange markets on the net return.
Gold is traded in dollars, so currency fluctuations can have a material impact on investors. For example, the “cable rate” between the dollar and sterling has ranged from a high of more than $1.32 at the start of this year to a low of just under $1.15, according to Invesco.
In US dollar terms, the gold price rose 16.7 per cent over the first six months of the year but is up by 23.7 per cent over the same period when converted to sterling.
At some point, that tailwind behind sterling investors in gold could easily turn the other way, so a hedged way of buying physical gold makes some sense.
Competition is hotting up in this segment. Traditionally, its been dominated by products from an outfit called Wisdom Tree — it has long had a Physical Gold Daily Hedged Fund (ticker GBSP) that has a total expense ratio of 0.25 per cent.
Invesco has now launched a rival product, the Invesco Physical Gold GBP hedged ETC (ticker SGLS), which has a fixed fee of 0.19 per cent plus hedging costs, as with the Wisdom Tree products.
Like many investors, my interest in gold has been piqued because I am cautious about equity valuations. That said, I’m still willing to believe there are interesting long-term strategies kicking around that can make sense.
If you’re suitably adventurous, I’d start with local Chinese equities. I have huge problems with local corporate governance but ignoring those domestic equity markets seems to me to be a terrible mistake. Finding the right vehicle is therefore tricky — but a US ETF issuer called KraneShares has set up shop in the UK market with its own (small) range of Chinese equity ETFs.
I think the most interesting is one based on the MSCI China ESG Leaders 10/40 index (ticker KESG). This index aims to provide exposure to large and mid-cap Chinese companies with high environmental, social and governance (ESG) performance relative to their sector peers.
If you’re a hardened investment cynic, you may be rolling your eyes at this point — two modish ideas, Chinese growth stocks and ESG, in one fund -what could possibly go wrong?
I think a focus on ESG could make a great deal of sense in a Chinese context, where the biggest constituents in the fund include Meituan (an ecommerce website), Tencent, Alibaba, China Construction Bank, China Merchants Bank, and a handful of biotech and drug companies.
In effect, you are cutting out all the old-world industries (many of which are export-oriented) and focusing on the rise of domestic consumer services businesses plus a smattering of biotech and pharma firms and a growing legion of companies interested in the new green grid.
According to KraneShares, since its inception in July 2013, the MSCI China ESG Leaders 10/40 Index has outperformed the MSCI China Index by 76 per cent. Launched in February, this ETF has a sensible total expense ratio of 0.40 per cent.
I think it’s worth keeping an eye on a range of ETFs likely to emerge from Lyxor Asset Management, based around the idea of Paris Alignment. This is a global framework aimed at averting dangerous climate change by limiting global warming to below 2C, preferably to less than 1.5C.
The approach is summed up via three objectives: do no harm; support Paris-consistent climate co-benefits and (whenever possible) foster transformative outcomes.
Cutting out the jargon, this essentially means investors should reallocate capital towards a low-carbon and climate-resilient economy and businesses actively involved in that objective. For these ETFs, this means a much more “impact” focused strategy. I think is preferable to what can sometimes be a rather fuzzy mainstream ESG approach, which usually involves immense lashings of greenwashing.
The first ETF in Lyxor’s range is focused on the S&P Eurozone Paris-Aligned Climate index (ticker EPAB, but at the moment only listed on the Paris stock exchange). We’ll probably see London versions very soon, starting I suspect with one based on the S&P 500.
Another new product that caught my eye comes from yet another US ETF issuer looking to shake up European markets. The issuer is called Granite Shares and it has been quietly introducing a radical idea to the UK market — a leveraged (three times) tracker product focused on individual US equities, and a smattering of UK ones too.
Short and leveraged trackers on well-known indices have been around for ages and they are a useful alternative to those experienced investors who want to stick with their existing share dealing accounts and not switch to spread betting accounts.
Granite Shares has taken this idea of upside and downside leverage and applied it to US tech stocks, launching nine long and short ETFs focused on a range of well-known stocks including Tesla (ticker 3LTS for long, 3STS for short) plus Alphabet, Amazon, Apple, Microsoft, Netflix, Facebook, Nvidia, and Uber.
Granite also has the same structure available on a small handful of UK equity names such as AstraZeneca, BAE Systems and Barclays. The attraction of the 3x daily returns model for the active, experienced investor is that you don’t have any of the margin problems associated with spread betting and you only ever lose what you invest and no more. That said, this isn’t a product you buy for the long term — in my experience, these kinds of trackers are held for a few weeks at very most.
Last, but by no means least, HANetf, a newish UK ETF issuer, has come up with an idea which I think has been a long time in the making. Like many smaller outfits in this space, HANetf has a range of specialised thematic funds on everything from cloud computing to Chinese consumer businesses.
Many of these focused thematic ETFs make a great deal of sense but if I’m honest, I think they might struggle to make it into some portfolios because there’s too much choice and too many good ideas. HanETF’s solution is to launch a “fund of funds” ETF, incorporating a range of thematic sub-funds into one product including the cloud, cyber security, future cars, genomics, robotics & automation and social media.
Investors can gain access to all of these via one ETF called the HAN-GINS Innovative Technologies UCITS ETF (ticker ITEK for dollar, and ITEP for sterling). If you’re a growth investor who wants access to a broad range of alternative, tech-focused themes, this is a simple to understand and useful vehicle.
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