[This article appears in our December 2020 issue of ETF Report.]
Launching a successful ETF is hard. Launching one that takes off immediately is even harder.
Sometimes it takes a while for a fund to catch on with investors. A period of strong performance or a strategy that finds itself at the right place at the right time could propel an ETF from obscurity into popularity in a snap.
We’ve written about the top 20 ETF launches of 2020 here. In this article, we take a look at some of the interesting launches of the year that fall outside that list—funds that haven’t necessarily captured a ton of investor dollars just yet, but that are compelling enough that they could find themselves in the limelight in the future.
Reaching For Yield
Collateralized debt obligations (CDOs) got a bad rap during and after the global financial crisis, and rightfully so. They were a large contributor to the woes inflicted on the financial system more than a decade ago.
It may be surprising then that a similar group of securities is as popular as ever today: collateralized loan obligations (CLOs). Just like CDOs, CLOs group illiquid securities into batches that are then securitized and sold to investors. Instead of the mortgage-backed securities that make up CDOs, CLOs are typically composed of leveraged loans, or floating rate bank loans with low credit ratings.
And just like CDOs, CLOs are tranched debt securities. That means the highest-rated slices get paid before lower-rated slices get their share.
The Janus Henderson AAA CLO ETF (JAAA) focuses on these CLOs: the highest quality tranches with the lowest default risk. It’s a strategy that could be attractive for investors looking for the extra yield of leveraged loans with the security of the senior tranches.
The fund attracted a cool $120 million in one short month on the market, but it has the potential to grow much more in today’s low yield environment. Its sole competitor is the AAF First Priority CLO Bond ETF (AAA), which was first to market from a brand new issuer, and has roughly $10 million in AUM so far.
Active management is usually thought of as “stock picking.” But that’s just one way to do it. Another way to do it is a step higher, at the sector level. That’s what the Day Hagan/Ned Davis Research Smart Sector ETF (SSUS) does.
It picks and chooses which of the 11 stock market sectors to overweight and underweight based on a proprietary sector model. You can call it “sector picking.”
According to the manager, sectors are weighted based on fundamental, technical, economic and behavioral indicators. SSUS has picked up $123 million since its January debut.
Next Gen Of Triple Q’s
The triple-Q’s are as popular as ever. The Invesco QQQ Trust (QQQ), one of the first ETFs on the market, is having one of its best years ever, in terms of both inflows and performance.
It’s not a surprise then that the ETF’s issuer, Invesco, added another fund to its lineup, based on a similar theme. The Invesco NASDAQ Next Gen 100 ETF (QQQJ) tracks what Invesco calls the next generation of Nasdaq-listed companies.
While QQQ focuses on the 100 largest nonfinancial firms on the exchange, QQQJ tracks the next 100 biggest. The result is a completely different portfolio, but one that’s still heavy on technology and health care. The two sectors combine to make up nearly 65% of the ETF.
But where QQQJ really differs from its counterpart is the market capitalization of its holdings. QQQJ’s top holdings are in the $30 billion to $40 billion range, while QQQ, of course, holds giants with market caps of over $1 trillion.
For investors looking to invest in Nasdaq-listed tech and health care stocks on the smaller side, QQQJ is an intriguing option. The fund currently has $167 million in assets under management.
Others may find some interest in a QQQ clone that Invesco launched at the same time as QQQJ. The Invesco Nasdaq 100 ETF (QQQM) is 5 basis points cheaper than QQQ—at 0.15%—and provides an alternative vehicle to investors more concerned about cost than liquidity.
For a larger view, please click on the image above.
ESG Moves To Fixed Income
2020 has been a banner year for ESG. ETFs that select stocks based on environmental, social and governance criteria have really caught the attention of investors, who have added billions of dollars to those funds.
Could fixed income ETFs be next? Vanguard seems to think so. The venerable fund company launched the Vanguard ESG U.S. Corporate Bond ETF (VCEB) in September, and the fund has already picked up a solid $60 million in assets.
VCEB tracks the broad U.S. investment-grade corporate bond universe based on the Bloomberg Barclays US Corporate Index. It then narrows its portfolio based on ESG criteria supplied by index company MSCI.
While VCEB is not the first ESG bond ETF to the market, it is significant that Vanguard’s first ETF launch in two years is in this category. A similar launch this year was the iShares ESG Advanced Total USD Bond Market ETF (EUSB), which rolled out in June and currently has $135 million.
If you made a list of top financial market stories of the year, the explosion of the special purpose acquisition companies (SPACs) has to be on it.
SPACs, which are also known as blank check companies, have dominated the initial public offering (IPO) market this year, raising $63.6 billion via 174 IPOs, according to SPAC Insider. That’s more money raised through SPACs than in the past 10 years combined.
These companies raise money in the hopes of merging with private companies, offering a quicker, more guaranteed route to the public markets for those companies than if they went through the traditional IPO process.
SPACs have historically had a reputation of bringing low quality, speculative companies to market. But several successful SPAC mergers this year—like those that brought DraftKings, Virgin Galactic and Hyliion public—have piqued investors’ appetite for this up and coming asset class.
The Defiance Next Gen SPAC Derived ETF (SPAK) is the first ETF to capitalize on the trend. The fund currently has 36 holdings, 80% of which are stocks of companies that have already gone through the complete SPAC process, and another 20% in SPACs that are still searching for companies to merge with. SPAK has $21 million in AUM.
It remains to be seen whether this year’s SPAC phenomenon has staying power, but if it does, SPAK is one potential way to play it.
Non-US Country Sectors
ETFs covering specific slices of foreign markets were once quite common, but they’ve mostly disappeared due to difficulty in gathering assets, unless they target the Chinese market. However, 2020 saw the launch of at least two international sector funds.
The Nifty India Financials ETF (INDF) is the more recent rollout, and the first of its kind from a new entrant to the ETF markets: NextFins. There have been funds, now long closed, that tracked India’s small cap market and infrastructure sector, but none has covered India’s financials market.
Meanwhile, in September, Global X rolled out another addition to its broad offering of China-focused sector and industry funds with the launch of the Global X China Biotech Innovation ETF (CHB).