Economic uncertainty and volatility in the financial markets led to a sharp slowdown in U.S. initial public offerings (IPOs) in the first quarter of 2022, but the same retrenchment in activity hasn’t been evident in the ETF space.
According to PwC, there were only eight traditional IPOs in the first quarter of 2022, the lowest number of firms coming to market since the first quarter of 2016. There were an additional 54 SPAC IPOs in the same period, but even that was down 67% from a year ago.
In stark contrast, the number of new ETF launches in the first quarter totaled 115—29% more than the 89 ETFs that made their debut in the first quarter of last year (2021 ended up being a record year for new ETF launches, with 477 ETFs coming to market that year).
In other words, launches for U.S.-listed ETFs are on a record pace, giving investors a plethora of new ETFs to comb through and potentially invest in.
Combing Through The Haystack
Weeding through all of the new ETF launches can be a tedious task. There are plenty of unoriginal funds with no chance of attracting investor interest coming to market every day. Most new funds will fail to attract any notable interest, but the payoff from a successful product can be massive, so you can’t fault issuers for trying their luck.
But derivative products aside, after delving into this sizable group of new ETFs, I noticed a decent amount of legitimately interesting funds. Let me be clear, these are just funds that stood out to me. I’m not making the case that they are going to deliver exceptional returns, only that they provide exposure to interesting areas, and might be deserving of a closer look.
Grayscale Future of Finance ETF (GFOF)
The Grayscale Future of Finance ETF (GFOF) is interesting more so because of who manages the fund rather than the fund itself. This is the first ETF from Grayscale, the crypto heavyweight behind the Grayscale Bitcoin Trust (GBTC) and the Grayscale Ethereum Trust (ETHE).
Grayscale has famously tried to convert its over-the-counter-traded cryptocurrency products into ETFs to no avail. The SEC has thus far prevented the conversions, and Grayscale has gone as far as to hint that it could sue the regulator if it doesn’t get its way by the middle of the year.
If a GBTC ETF conversion happens, it would be a monumental event for the $28 billion fund and Grayscale. But the firm clearly wasn’t waiting around for that before it made a splash in the ETF world.
GFOF, which has gathered $16 million in assets in only two months on the market, gives Grayscale an opportunity to target those who are interested in investing in the broader evolution of finance, beyond just cryptocurrencies themselves.
The ETF seeks to invest in companies representing three pillars of the future of finance, which, according to the company, are: digital asset infrastructure, technology solutions and financial foundations.
GFOF’s portfolio isn’t much different than other ETFs that track themes like “fintech” or “blockchain”—top holdings include PayPal, Block, Coinbase and Robinhood—but Grayscale’s long history in the crypto space gives it a perspective and experience that competing ETF issuers arguably don’t have.
It will be fascinating to see whether that experience can lead to the outperformance of this fund.
VanEck Digital India ETF (DGIN)
For a long time, India has been a favorite for investors seeking opportunities in emerging markets. The country’s strong economic growth and massive population have fueled interest in India ETFs, like the $5.6 billion iShares MSCI India ETF (INDA).
Relative to other emerging markets, India has done quite well, with a gain of 58% for INDA over the past five years, compared with 33% for the iShares Core MSCI Emerging Markets ETF (IEMG).
For broad market exposure to India, you can’t do much better than INDA. But if you think that, like their counterparts in the U.S., tech firms in India will be the fastest growing and most profitable businesses in the country, then a more targeted, technology-focused ETF might make more sense.
That’s what the VanEck Digital India ETF (DGIN) is. It holds stocks of companies operating in the fields of technology, telecommunications and internet applications.
While India wasn’t much of a tech powerhouse in the past, the country is quickly embracing the digital world. The country’s payments system, UPI, is seen as one of the most modern and efficient in the world.
At the same time, numerous U.S. tech titans have invested billions of dollars in the country, seeking to capitalize on the country’s strong fundamentals. While the U.S. giants will surely benefit from India’s growth, domestic tech companies may have the most to gain from the digitization of the second-most-populous nation in the world.
ROC ETF (ROCI)
Let me be honest: I’m skeptical that the ROC ETF (ROCI) is going to catch on, but it’s so out there that I had to put it on this list. ROC stands for “return on character,” and the thesis of the fund is that the character of corporate leadership determines how successful a company is.
The press release announcing the fund’s launch describes its strategy far better than I ever could. Here are some relevant quotes:
“ROC Investments has built an actively managed strategy to invest solely on the basis of the character of corporate leadership. The core strategy will be to identify and buy U.S. companies with management behavior that exemplifies the highest level of character.”
“The four pillars of ROC’s character model – Integrity, Responsibility, Forgiveness, and Compassion – are the same principles parents seek to instill in their children, and yet they are often found lacking in the financial world. Far more than exterior characteristics like education, tenure, politics, age, industry or religion, it is these interior traits that determine character. Our hope is that the ROC ETF will show that not only does character matter, but it is the best way to live and invest.”
“ROC is based on groundbreaking academic research by global consulting firm KRW International, which found a consistent, observable and measurable relationship between senior leadership character and an organization’s ability to execute its strategy. Leadership teams with high character scores showed higher profitability (as measured by return on assets), higher workforce engagement and lower levels of corporate risk.”
Don’t get me wrong—I want to believe that this strategy works. But it strikes me as a little too hopeful, maybe even pollyannaish. It’s also an extremely subjective way to pick stocks. The top holdings of the fund currently include Apple, Microsoft, Amazon, United Health and Costco—blue chips that you’re probably not going to lose your shirt investing in. But we’ll see whether this ETF delivers actual outperformance and earns its 0.49% management fee.
BondBloxx USD High Yield Bond Consumer Cyclicals Sector ETF (XHYC)
Like much of the fixed income markets, high yield bond ETFs have had lousy performance this year. The iShares iBoxx USD High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg High Yield Bond ETF (JNK) are down more than 6% a piece on a year-to-date basis.
But what makes the BondBloxx USD High Yield Bond Consumer Cyclicals Sector ETF (XHYC) interesting isn’t what’s going on with junk bonds broadly right now. Rather, XHYC and its six sister funds have given investors the ability to more precisely target different segments of the junk bond space, something that could be useful in constructing fixed income portfolios.
The seven ETFs track different junk bond sectors—energy, industrials, financials/REITs, telecom/media, health care, consumer cyclicals and consumer non-cyclicals.
For a risky space like junk bonds, the ability to home in on particular sectors could be attractive to some investors. For instance, during times when oil prices crash, bonds of junk-rated energy companies become extremely risky. Being able to filter out the bonds of those companies could lead to outperformance versus the broader high yield market.
BondBloxx has plans to unveil other suites of precision fixed income ETFs. With most fixed income ETF categories already saturated with funds, that seems like a pretty solid greenfield opportunity for the issuer. We’ll see whether these ETFs catch on with investors.
Follow Sumit Roy on Twitter @sumitroy2