Virtue signalling ETFs: religion, veganism and marijuana used to tap trends

Many exchange traded funds — collections of stocks that track an underlying index — have moved beyond traditional global indices to instead converge around an ever-wider variety of given themes.

A growing number of thematic ETFs now aim to tap into long-term structural trends such as changing consumer tastes or technological innovation, or market themselves to a particular group.

There are many colourful examples. The Horizons Marijuana Life Sciences Index was the world’s first cannabis ETF when it launched two years ago. The ETF promises investors the chance to gain exposure to “a basket of North American publicly listed life sciences companies with significant business activities in the marijuana industry”. The product has grown to command about C$760m ($578m) in assets.

Inspire Investing, a company based in Silicon Valley, has launched several “biblically responsible” ETFs aimed at conservative evangelical Christians. Chief executive Robert Netzly told the Financial Times last year that clients are often “mom-and-pop investors left behind by Wall Street”.

Its products exclude, for example, companies that participate in or support lesbian, gay, bisexual or transgender causes.

One such fund is the Inspire Global Hope ETF, also known by its ticker BLES. It invests in large global companies that it deems to be “biblically aligned” and donates half of its management fee profit “to support Christian ministry”.

Meanwhile, Beyond Investing, a newly created company, has plans to launch the world’s first vegan ETF later this year. Filings with the Securities and Exchange Commission state the US Vegan Climate ETF will track an index of large US-listed companies that Beyond Investing has designed to exclude those that derive profits from areas such as animal testing, animal-based products or the use of animals in entertainment.

“The investment case is partly from a consumer and ethical standpoint,” says Claire Smith, chief executive of Beyond Investing. “Where your money goes is important. People are wanting to live in a cleaner, healthier world.”

Other thematic products are broader, considering issues such as how technology will disrupt a variety of industries, or how to take advantage of investment opportunities presented by ageing populations.

People are wanting to live in a cleaner, healthier world

One of the biggest thematic funds is based in Europe, the $2bn iShares Automation & Robotics ETF. It provides exposure to groups such as Dutch satellite navigation group TomTom and Japanese semiconductor maker Renesas Electronics.

There were about 1,300 thematic exchange traded products at the end of June, according to data provider ETFGI. It is not difficult to see why thematic investing is flourishing. Products are woven around compelling narratives to entice would-be investors, and ETFs themselves are relatively straightforward to launch.

The growth in thematic ETFs reflects a desire by investors to find growth opportunities in a complicated global economy, moving beyond traditional geographic divisions to take advantage of broader trends, says Kenneth Lamont, a research analyst at Morningstar, a data provider.

“They tap into powerful narratives,” he says. Yet he warns that some are little more than gimmicks. “The beauty of these products is that they’re very idiosyncratic. [But] a lot of these products are coming to market. Not all are going to survive.”

A study by Morningstar last year found that the mortality rate of thematic ETFs was strikingly high: almost four in five products launched in Europe before 2012 have shut up shop, compared with less than half of typical equity ETFs over the same period. “This means that even if investors select a winning theme, they will be lucky if their chosen ETF survives long enough to profit,” the report said.

Assessing the performance of thematic ETFs as a category is difficult, says Mr Lamont, as they cut across so many sectors and countries. Being geared towards niche areas also means they often invest in smaller stocks, which can make financial performance more volatile.

The performance of the marijuana ETF, for example, has been stellar since its launch, with an annualised return of nearly 40 per cent. However in the three months to June it posted a loss of 14.5 per cent. Its assets have also slipped considerably from a peak of around C$1.1bn last year.

This drop reflects the volatility of the underlying stocks, according to Steve Hawkins, chief executive of its operator, Toronto-based Horizons ETFs. “It’s not like the S&P 500. It’s a young, new sector,” he says.

Ms Smith of Beyond Investing argues that products that appear extremely niche can still have a broader appeal. “You don’t have to be vegan to buy the product,” she says, pointing to increased consumer interest in protecting the planet and using alternatives to meat and dairy.

Investors may need to have strong convictions about the investment strategy they are buying into, as fees for thematic ETFs are usually higher than their vanilla counterparts. The average annual fee for a fund launched in the past year was more than 0.5 per cent, than their non-thematic ETF equivalents.

Mr Hawkins says the cannabis fund is not a gimmick, citing the fast-growing legal cannabis industry. But he admits that the sector can be prone to rushing out new products simply to test the waters. “There’s a lot of people throwing a lot of stuff against the wall and seeing if something sticks,” he says. “People shouldn’t be using them as their core investments.”