When I heard that iShares and Morningstar were teaming up with Ric Edelman to launch the iShares Exponential Tech ETF (XT), I have to admit I smirked a little bit.
Not a snarky smirk, but the smirk of recognition. You see, once upon a time, I ran a fund that looked an awful lot like XT—it was called “OpenFund.” Matt Hougan was on the team, as was co-founder Don Luskin (who’s now a contributor to our Alpha Think Tank.)
The premise behind OpenFund—which was (gasp!) actively managed, and (the horror!) a traditional mutual fund—was that certain long-term changes in the economy were taking place. These changes were fueled by technological change that was undervalued by the market.
It was an insight I’ve continued to believe, even 15 years after our fund—like so many tech funds—succumbed to the dot-com crash. So it’s nice to see thematic investing in the “new economy,” as we all had the hubris to call it, making a comeback.
The New-New Thing Is Still New
But while Don Luskin, Matt Hougan and I approached this from a single-stock, seat-of-the pants methodology all too common in active management, XT takes the core idea and actually puts it into an index methodology. And with $550 million or so flowing into XT in just two days, it’s probably worth reviewing what that index is actually doing.
You can read the methodology from Morningstar—and really, you should if you’re thinking about investing. But I’ll give you the highlight: It’s an equally weighted portfolio of 200 companies that Morningstar analysts believe participate heavily in one of nine new economy-style, buzzword technology themes, from “big data” to “bioinformatics” to “3-D printing.”
It hunts from a broad global set of firms, without regard to market cap or location. That said, as a last resort, the methodology will pick the smaller of two companies for inclusion if they’re “tied” for entrance into the 200.
This idea of “thematic” investing isn’t, as I’ve said, new. But it is becoming a lot more common. A recent McKinsey study cited the rise of thematic investing among institutions as “the most intriguing insight we took from a series of interviews we conducted in 2013.”
Where The Rubber Meets The Road
So what does this Edelman-inspired, Morningstar-baked and Blackrock-packaged ETF get you?
The resulting portfolio is interesting. Obviously it’s not claiming to be representative of the broad equity markets. But it still has good global coverage (only 66 percent U.S., with broad diversification outside). It’s not meant as some sort of global fund, represented here by the iShares MSCI ACWI ETF (ACWI | A-96), but neither is it hyperconcentrated.
It’s got a little home bias and it’s light on Japan.
It’s also not really a tech fund—at least how we normally think of tech ...