The iShares Exponential Technologies ETF (XT) that launched this week is an unusual collaboration between a noted financial advisor, a respected financial research firm and the global leader in exchange-traded funds. What it offers investors, according to its creators, is a way to invest in technologies and themes that could potentially transform society and offer investment growth opportunities

The idea for the fund came from Ric Edelman, chairman and CEO of Edelman Financial Services in Fairfax, Va., one of the nation’s largest RIA firms. Edelman says he has been studying so-called exponential technologies that have the ability to accelerate the speed, efficiency, cost-effectiveness and power of how things get done, and in the process displace older technologies, create new markets and potentially make significant economic impacts.

“I began to try to identify ways we can incorporate companies engaged in this area into our client portfolios,” he says. “We couldn’t find a fund that accomplished this. There are a lot of tech funds, but they’re just sector funds playing the tech sector that all own the same stocks––Intel, Microsoft, Apple, Google and the like. They’re aggressive and volatile, which is the nature of the tech sector.

“That’s not what I was looking for,” he adds. “I was looking for companies that were using technology, not merely creating it, and using it to advance their businesses.”

When Edelman couldn’t find anything in the marketplace that fit the bill, he approached BlackRock about a year ago to gauge their interest in creating a product in their iShares fund family that fit the theme of transformational companies. 

BlackRock liked the idea, reached out to Morningstar to create the index, and the two companies joined forces to create the fund.

The resulting iShares Exponential Technologies ETF is based on the Morningstar Exponential Technologies index. The constituents in this equal-weighted index represent nine technology trends that offer the potential to upend traditional ways of doing business: 3-D printing, big data and analytics, bioinformatics, energy and environmental systems, financial services innovation, medicine and neuroscience, nanotechnology, networks and computer systems, and robotics.

Constituents include companies developing and/or leveraging promising technologies.

According the fund’s prospectus, constituents are picked across all market cap sizes and geographic regions, and are ranked in an order emphasizing exposure to the exponential technology themes, with up to five leading companies within each theme included in the underlying index, with additional companies added until the index has 200 members.

“Only 30 percent of the fund is in technology stocks,” Edelman says. “I think anyone who looks at the details of the fund will be surprised by its construction. It’s not what you’d expect it to be, especially with the name of Exponential Technologies Fund.”

Along with technology (32 percent), the fund’s other major sectors include health care (29 percent) telecommunications (12 percent) and industrials (11 percent). Financials make up 5 percent.

“This fund exceeded my expectations,” says Edelman, who notes he didn’t play any role in the ETF’s creation other than providing some guidance to Morningstar about the basic concept for his idea. “I was impressed with Morningstar’s index construction, and they went in a few directions I never thought of––one being financial services innovation as one of the nine themes, which hadn’t occurred to me.”

Both Edelman and BlackRock stress that neither he nor his firm are being compensated in connection with the XT fund or its index.

“We simply are an investor in the fund on behalf of our clients,” he says, adding that he likes the fund as a diversified, low-cost way to gain exposure to potentially transformative companies. The fund’s expense ratio is 0.47 percent.

Edelman notes that of the 198 securities currently in the fund, about 140 of them are stocks that weren’t previously in his clients’ portfolios.

The fund’s top holding is Pharmacyclics, a biopharmaceutical company focused on treatments for cancer and immune-mediated inflammatory diseases. Familiar names within the top 10 holdings include First Solar, Valient Pharmaceuticals, Sunpower and Netflix.

For BlackRock, the XT fund added a new wrinkle in its ETF development process.

“It’s not unusual for us to take client input into consideration when building new products, but what’s unique in this case is it’s the first we’ve done so with a registered investment advisor,” says Hollie Fagan, head of BlackRock’s dedicated RIA business. “In the past, a lot of our client-led innovation with respect to iShares came through institutional investors. Because of the deep relationship we’ve built with Ric over the years, when he couldn’t find a product in the investment universe that met what he envisioned, he had the confidence to make iShares his first call.”

She adds that part of the appeal of working with Edelman on the XT fund is his success in working with mass affluent clients. “That’s a different business model from most RIAs, and one we think we can learn from in terms of our messaging to the end investor,” Fagan says.

Other Innovative Funds

In the year between when Edelman first approached BlackRock with his fund idea and this week’s launch of the iShares Exponential Technologies ETF, Ark Investment Management in New York City last autumn launched a suite of four actively managed ETFs focused on cutting edge and potentially disruptive themes.

The ARK Industrial Innovation ETF (ARKQ) focuses on companies in the fields of robotics, autonomous vehicles, alternative energy, 3D printing and space exploration, among other industries. The fund has attracted $10 million in assets and has posted a barely break-even return since inception.

The ARK Web x.O ETF (ARKW) is composed of companies expected to benefit from the shift in technology infrastructure from hardware and software to the cloud, and involves the likes of cryptocurrencies, big data, services and data mining, and the so-called “Internet of Things. It has garnered $10 million in assets and is up about 8.5 percent since its launch.

The ARK Genomic Revolution Multi-Sector ETF (ARKG) focuses on products and services that rely on genomic sequencing, analysis, synthesis or instrumentation. The fund has $8 million in AUM and to date is the best performer in the group with a 12 percent rise during its short life.

The ARK Innovation ETF (ARKK) is a composite of the securities in the various industries found in the prior three funds. Its asset base of $6.2 million is the smallest of the bunch, and it’s up 2 percent since inception.

All four funds carry an expense ratio of 0.95 percent.

Of course, the ETF universe already has a variety of funds dedicated to sectors that are thoroughly plugged into the 21st century in such areas as the cloud, cleantech, early-stage biotech and cybersecurity.

With the launch of the four Ark funds late last year, along with the newly launched iShares Exponential Technologies ETF, investors now have greater access to companies and sectors that potentially can reshape business and redefine society.