XT: The ‘New Economy’ In An ETF Wrapper

How Ric Edelman is reinventing the ‘new economy’ investing paradigm.

Reviewed by: Dave Nadig
Edited by: Dave Nadig

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.


Country Breakdown
United States66.52%49.57%16.95%
United Kingdom5.17%6.20%-1.03%
India1.12% 1.12%
Norway1.06% 1.06%
Denmark1.01% 1.01%
China 2.62%-2.62%
Korea (South) 1.64%-1.64%
Taiwan 1.38%-1.38%



It’s also not really a tech fund—at least how we normally think of tech ...



Sector Breakdown
Information Technology32.04%13.86%18.18%
Health Care28.78%10.85%17.93%
Consumer Discretionary3.60%12.37%-8.77%
Consumer Staples0.00%8.93%-8.93%



It’s definitely more tech heavy, and loaded with health care and telecom stocks, but it hardly has the heavy concentrations of a pure tech sector fund.


As for capitalization, since it picks from the global market and equal-weights, you might expect a heavy small-cap bias. And it definitely has its share of small companies, from $560 million Portugal Telecom to $750 million Renewable Energy of Norway, held in equal weights. It also has soon-to-be trillion-dollar Apple Inc.


But with a weighted average market cap of more than $25 billion, it’s still firmly in large-cap territory, although not in ACWI’s $97 billion range.


So how then do you think about a fund like this?


Putting ‘XT’ In Context

On the one hand, it’s easy to be dismissive of it. It sounds like a marketing plan for a new economy fund from 1999—and I should know, I wrote one. On the other hand, the construction methodology is sound, even if it is still driven by the opinions of human analysts.


Also, its expense ratio of 47 basis points is hardly excessive for a niche fund, and with $550 million plowed into XT on the second-day by Edelman clients, the fund will likely be well run, track well and trade well.


What it comes down to is faith. Are you a believer in Ric Edelman’s vision for the future? To use XT as part of your equity exposure, you have to not only believe in his core themes here, but you have to believe that the positive forces of those themes are undervalued by the market.


Me personally? I’m not so sure.


A Sense Of Doubt, Sort Of

It’s not like Wall Street analysts aren’t already frothing at the mouth over tech companies and health care plays. XT’s price-to-earnings multiple of 18 doesn’t suggest it’s deeply cheap (ACWI is hovering around 22). So you have to believe there’s real untapped, unacknowledged growth in these themes.


I tend to think the market’s pretty good at pricing these prospects in. But then again, Edelman has more than 20,000 clients and $14 billion under advisement, many of whom are likely true believers.


That’s how you get half a billion into a fund in one day.


Whether they’re right or wrong, at least they can chase this new, new economy in a low-cost, liquid, tax-efficient transparent wrapper.

At the time this article was written, the author held no position in the securities mentioned. You can reach Dave Nadig at [email protected], or on Twitter @DaveNadig.



Prior to becoming chief investment officer and director of research at ETF Trends, Dave Nadig was managing director of etf.com. Previously, he was director of ETFs at FactSet Research Systems. Before that, as managing director at BGI, Nadig helped design some of the first ETFs. As co-founder of Cerulli Associates, he conducted some of the earliest research on fee-only financial advisors and the rise of indexing.