Given that it’s the summer silly season, I thought I’d try to cheer up readers with a quick overview of the latest – sometimes slightly whacky – ideas coming out of the ETF industry here in the US. Although new issuance has dried up over the last few weeks (as you’d expect, given aforementioned silly season), 2022 has been a busy year for ETF issuers. According to the excellent Heather Bell over at etf.com, there were 206 new launches in the first half of 2022 compared to 196 in the equivalent period last year – although it should be said that closures also accelerated over the same period.
Perhaps the most noteworthy trend is the rise of single-stock ETFs. This is a niche space currently dominated by smaller, nimbler issuers such as AXS, GraniteShares and Direxion. The idea here is to track the daily price of a popular stock such as Apple, Tesla or Nvidia, and then either provide short or long exposure, usually within a range of -1x to 1.5x those daily returns. Innovator ETFs has taken the idea one step further and issued what are, in effect, capped single-stock products, on Tesla, for instance, that mitigate the downside and cap the upside.
It has to be said that the idea of single-stock tracker products isn’t new – the UK market has had a whole gaggle of single-stock ETFs for many years now, largely provided by GraniteShares and main rival Leverage Shares. Needless to say, there was a howl of disapproval when these UK products launched, with critics arguing unsurprisingly that they would lead to over-trading and increase short-term risk within a portfolio. Flash forward a few years later, and I can’t say that we’ve seen a deluge of complaints. In fact, I’d say it’s been rather underwhelming, if I’m honest, because these products are effectively a regulatory/platform arbitrage; most active UK-based investors and traders used spread betting to achieve similar results, and all that these single-stock ETPs did was allow a slightly broader range of traders to be active in the market. I imagine this will be echoed in the US, where the arbitrage will be between using existing options-based structures and using single-stock ETPs.
The one exception has been single-ETF leveraged products – inverse (and long) trackers based on Cathie Wood’s ARK funds have been very popular with more mainstream investors, for reasons that are very obvious. If you are in a negative-momentum, growth stock panic, Wood’s ETFs will take the brunt of the selling and thus a leveraged short product (up to 3x) will prove very popular. And vice versa during bull market phases.
We’ve also seen the emergence of single-government-bond ETFs, this time from a new house called F/m. These will take a particular year and then invest in the most recently issued bonds in that particular tenor. When I first saw this I did wonder, why bother? Surely the market in US Treasuries is so vast and liquid that it doesn’t need a ‘derivative.’ But this is in fact quite a cunning idea, for a few reasons: It makes accessing the underlying bond very easy, it’s tax efficient, and, here’s the big plus for me, it offers a monthly dividend.
Talking of bonds, what surprises me is that there’s been a generous helping of new bond-related ETF issuance, which is arguably a bit peculiar given the generally dreadful returns from investing in most bonds in this era of high inflation and ever higher interest rates. Market leader iShares has been especially active. I’d draw attention to two of its new products. The first, which trades under the ticker AGRH, tracks the US Aggregate Bond index but with an options-based interest hedge. The second, AGIH, tracks the same index (via the iShares Core US Aggregate Bond ETF, ticker AGG) but with an inflation risk overlay. In each case, the overlay consists of up to 10 passively constructed, quantitatively selected swaps of varying maturities that hedge against either inflation or rising interest rate risk.
With the interest rate version, the fund hedges the portfolio’s duration exposure at key points on the yield curve, and in return gives up some of the upside from owning the underlying bonds. With AGIH the hedge is not on actual inflation but on expected inflation via swap contracts. That means this fund will underperform its basket of bonds if the rise in actual inflation is less than expected, and will outperform (before costs) when inflation exceeds expectations.
What’s interesting here is that these kind of products and strategies have been around for an absolute age in the institutional space and are now extremely common. By bundling them up in an ETF, iShares has given access to the strategy, cheaply, to a much wider audience. My only slight niggle is that these ETFs might be almost too late – there’s a good chance that both inflation and interest rates peak sooner than expected!
Sticking with innovation in the bond space, I’d highlight another development – the continued rise of single-year, bullet bond ETF trackers. iShares has just issued another addition to this growing niche via its iShares iBonds Dec 2032 Term Corporate ETF (IBDX) which has a total expense ration of 0.10%. According to Bell at etf.com, all of IBDX’s holdings are investment-grade corporate bonds set to mature in 2032. The other funds in the line of ETFs cover 2022 through 2031. I’m generally a fan of these bullet funds as they provide a brilliant tool for financial planning and managing cash flows for clients, especially as they close in on retirement.
Two last new ETFs merit mentions in passing. The first is based on the idea of sustainable gold. We’ve seen the whole ESG and sustainability revolution impact/infect (depending on your ideology) large parts of the asset class spectrum, but commodities have always been slightly tricky. Let’s be clear – large parts of the commodity spectrum have real troubles ticking ESG boxes, and gold mining is one of them. There are obviously all the issues with developing world mines and local workforces but even in the developed world there are issues surrounding pollution of rivers. Gold is also a widely owned asset and thus should be a real focus for sustainability, which is why I think a new ETF called the Franklin Responsibly Sourced Gold ETF (FGLD) is noteworthy. The FGLD only owns bars mined after 2012 based on the London Bullion Market Association’s Responsible Gold Guidance, which aims to minimize human rights abuses and prevent money laundering (a big issue in Central- and West-African-sourced product).
Last but by no means least, the contrarian in me can’t help but think that the launch of a new ETF from the EM specialist house Matthews is brilliantly timed. A few weeks ago,M launched the Matthews China Active ETF with a ticker MCH and an expense ratio of 0.79%. A number of things are of note here: Matthews are a widely respected Asian equities house and in my experience the Chinese onshore (and Hong Kong) market really does require active stock selection. To describe the local markets as somewhat tricky is understatement of the century. The Matthews team can also build ESG considerations (a real challenge in China, one would presume) into their portfolio construction. Last but by no means least, Chinese equities are dirt cheap, and according to many measures, back to pre-2015 valuations. We all know why sentiment is so bearish and the China hawks are everywhere at the moment – rightly so, given the ‘zero Covid’ shambles. But at some stage, contrarians might start to look again and see past the geopolitical risks.
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August 22, 2022 at 11:43PM
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The most exciting – and strangest – ETF launches of 2022 - Citywire USA
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