Exchange-Traded Funds (ETFs) have been around for almost 30 years with an estimated US$6 trillion globally now tied up in these popular investment vehicles.
The idea is a very simple one: an ETF provides exposure to market, industry, or commodity by acquiring a basket of investments in said area of interest.
So, for example, instead of acquiring gold in times of crisis, investors might buy up shares in the NASDAQ-quoted SPDR Gold Trust, the largest ETF of its kind backed by physical gold.
READ: The Proactive Guide to ETFs
A reasonably new innovation is the thematic ETF, which was pioneered in Europe by a firm called ETF Securities (now Wisdom Tree Securities) and its “business within a business”, Canvas.
Started in 2013, over the space of five years, Canvas went from zero to £3.5bn under management across 20 ETFs
Strikingly, half the money resided in just two ETF pots – a first-of-its-kind robotics fund launched in 2014 and a cybersecurity fund that emerged just under a year later.
The two continue to exist under the Legal & General banner after Canvas was sold two years ago.
Thematic investment
The four principals of Canvas are now the driving force behind two new thematic ETFs - the Rize Cybersecurity and Data Privacy UCITS ETF (LON:CYBR) and the Rize Medical Cannabis and Life Sciences UCITS ETF (LON:FLWR).
Talking about the cannabis ETF, Rize co-founder Rahul Bhushan: “We always saw an opportunity in this space. But today it is now much more than a North American opportunity; it’s global. There’s a lot of new companies coming to market.”
The cannabis ETF, which is listed on the London Stock Exchange and Deutsche Boerse, steers away from the growing but still problematic recreational segment. In fact, it operates a strict exclusion list that spells out which companies it avoids investing in, which in turn should keep the ETF on the right side of compliance officers.
There is still plenty go for in the medical cannabis arena where companies such as GW Pharma are setting the pace and the big beasts of the traditional pharma sector such as Novarits and Teva are also getting involved. And there is a pond full of minnows with university spinouts swimming their way in shoals to the market.
“It’s a great thematic story,” Bhushan points out. The prevalence of opioid addiction, in the US in particular, has sent the drug majors scurrying for an alternative. And that alternative may well be natural and cannabis-derived. Researchers, meanwhile, are also assessing its use in cancer treatment, multiple sclerosis, ADHD and anxiety.
Dynamic exposure
Both Rize ETFs provide what’s called dynamic exposure to an investment theme, meaning the basket of stocks it buys and sells is constantly evolving along with the market.
“This means you can ride the growth wave rather than having to stock pick,” says Bhushan.
The cybersecurity ETF, which is traded on the Borsa Italiana as well as London and Frankfurt, is a 2020 reboot of the 2015 Canvas original.
“We were the first to the market with that particular product,” says Bhushan.
“What we have created today is a cheaper alternative, but with an upgrade. It [the original Canvas ETF] was certainly suitable for the context of cybersecurity back in 2015, but today there’s a lot more you have to think about when building a portfolio.”
Data privacy opportunity
One of those new areas is data privacy regulation, while cloud-based security is also a massive growth area along with artificial intelligence and the security around internet of things.
“I think we have created a more dynamic product,” says Bhushan says of the cybersecurity ETF.
Both ETFs are benchmarked against the MSCI World Index, which is broad brush. But as Bhushan points out: “It’s tricky with thematics such as cannabis or cybersecurity; there’s no off-the-shelf benchmark.”
After just five weeks since launch, Rize is starting to see the “early retail money” coming in via financial advisers and wealth managers.
Experience is key
Previous experience starting from scratch at Canvas means the team knows what it takes to build interest. Getting to $/£100mln of assets is a key staging point in the journey.
“We found that once we hit this point things just flew,” says Bhushan.
“There are all these people waiting on the side-lines that can’t buy a fund that is less than £100m.
“These are the big-ticket allocators that can come in once this threshold is passed.
“We saw the same thing with our old thematic funds. In the first year when we launched, we got to £23mln in assets.
“Over four and a half years that fund went to a billion. These things do take time, it is always exponential.
“We are confident.”