Exchange traded funds, or ETFs, have grown in popularity over the last few years to reflect changes in the market and investor preferences.
Their popularity grew rapidly during the pandemic and the US ETF market currently stands at over $4tn.
Popular ETFs track indices giving exposure to a host of companies within an area of interest. While an S&P 500 ETF would likely be the most common, more specialist securities allow for investment in niche areas of the market.
These low-cost, tax efficient and easily traded funds can be a useful option for investors in making up a small portion, or satellite option within their portfolio.
Below, two market commentators each pick a satellite ETF to complement an existing portfolio.
Rize Sustainable Future of Food
Andy Merricks, manager of the EF 8am Focussed fund, opted for the £200m Rize Sustainable Future of Food UCITS ETF.
“I’m suggesting this despite being a devotee to T-bones and pork chops,” he said.
“But there is undoubtedly a movement towards the changing habits of the world’s population and, as a longer-term investment, I think that there is more to this sector than simply the ‘it’s good for the environment’ lip service that is heard so often today.”
He added that while the pandemic’s legacy is still to be played out, the delivery of food in its many forms is one that will develop further.
Exposure to this ETF gives access to dozens of companies that are, according to the factsheet, “favourably positioned to ride the tailwinds of the sustainable future of food theme”.
The ETF invests in nine subsectors: plant-based and organic foods; ingredients, flavours and fragrances; food safety and testing; precision farming; agricultural science; land-based aquaculture; water technology; supply chain technology; and sustainable packaging.
“It’s clear to see that it’s not just about whether we eat less meat or not,” said Merricks.
“A number of these areas are in their early days, so investing through an ETF makes sense as some companies will move on to become industry giants while others will not make it.
“An index-driven approach can be said to soften the blow to a portfolio of the latter group whilst allowing participation in the former.”
Performance of ETF vs sector since launch
Source: FE Analytics
Rize Sustainable Future of Food launched in August of last year and has since returned 16.61 per cent, compared to 20.04 per cent for the average fund in the Gbl ETF Equity – Other Specialist sector.
“Performance to date has been pleasing, if unspectacular,” Merricks added. “To take a relatively early stake in a forward-looking sector could be a rewarding one over the longer term.”
It has an ongoing charges figure (OCF) of 0.45 per cent.
EMQQ Emerging Markets Internet & Ecommerce ETF
Tom Bailey, ETF specialist at interactive investor, has gone for the $316m EMQQ Emerging Markets Internet & Ecommerce ETF.
This thematic ETF is focused on ecommerce and other internet platform companies within emerging markets.
Bailey said: “Simply, it aims to give you exposure to the Ubers, Deliveroos, Amazons and Etsys of the world’s developing economies.
“This is a play on both the rise of the middle class in emerging markets, with their increased spending power, alongside the growth of digital companies within the region.”
He said that this does lend itself to being heavily dominated by China.
“It now has a weighting to China of over 65 per cent,” he added. “It also has hefty weightings to the big China tech companies such as Tencent, Alibaba and Meituan.
“These companies are also dominant in many emerging market funds, both active and passive, so investors should watch out about overlap here.”
Having said that, he outlined that the ETF’s index is regularly updated with new eligible companies.
Performance of ETF vs sector since launch
Source: FE Analytics
Since EMQQ Emerging Markets Internet & Ecommerce ETF launched in 2018, it has made a total return of 80.93 per cent, while the Gbl ETF Equity – Tech Media & Telecom sector as a whole made 54.52 per cent. It also has an OCF of 0.45 per cent.
However, year-to-date, the fund has made a loss of 7.11 per cent.
“The dominance of Chinese tech stocks has been a bit of drag on the ETF this year,” said Bailey. “It’s been a tough year for Chinese tech, hurt by both the rotation from growth/tech to value/cyclical, as well as the newly arisen risk of a so-called crackdown on tech companies in China.
“Of course, what this means in practice is anyone’s guess and perhaps there will be more short-term pain. But over the long term, the broader ecommerce and digital platform themes both within China and emerging markets seems unlikely to go away.”