Hortz: How would you characterize your thematic investing approach and portfolio in contrast to an innovation portfolio focused on choosing individual stocks?
Arthur: By investing in broad themes via ETFs, we do not have to choose individual names. Within themes, there is a lot of single company risk – a company may not survive for any number of reasons – but the odds of an entire theme going out of business are much, much lower. The impact of a single name going under within an ETF portfolio with 40 or so names is decidedly lower than a 5 or 10% direct allocation to a single name in a portfolio. This allows us to spend our time identifying the broad themes we think have the best opportunity to grow and succeed and we do not have to worry about, first, picking a good theme and then, second, identifying the best companies within that theme and assuming that company risk.
Hortz: How do you recommend an advisor work with and allocate your ETF to a client’s portfolio?
Arthur: Each investor’s goals are different, but this strategy likely resides as part of a growth stock allocation. We have seen anywhere from 10-25% of someone’s global portfolio allocated to this type of investment. We would also like to point out that our ETF is very diversified.
At first pass, a thematic strategy might be thought to have considerable overlap with the S&P 500 or NASDAQ, in effect doubling down on those more concentrated indices, but with 360 names represented in our ETF, you get great diversification. The top 10 names in TMAT ETF account for roughly 15% of our innovation portfolio versus 50% or more in some other tech-focused growth portfolios or indices. Exposure to the headline names of Facebook, Apple, Amazon, Microsoft, and Google is less than 4% in our ETF versus the NASDAQ 100’s exposure of 38%.
So, our ETF may be paired with a core, passive equity allocation without doubling down on the concentrations that already exist in that core equity position. Furthermore, the ETF is 60% US and 40% international, so it is more than just US exposure, which adds another element to the diversification benefits.
Hortz: Any other thoughts or recommendations that you can share with advisors about incorporating innovation as an investment theme?
Arthur: Given the dramatic shift and acceleration of technology and the subsequent adoption that has been brought on by the pandemic, it may be prudent to have at least some exposure to innovation. As they say, necessity is the mother of invention, and it certainly became necessary to make changes to our lives when everyone was suddenly told to stay at home. Innovation is not something that is going away any time soon and given the continued exponential gains in areas like computing processing power, it stands to reason that we will see at the very least a continuation, if not an acceleration, in innovation.
The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation, and unique client/community engagement strategies. The institute was launched with the support and foresight of our founding sponsors — Pershing, NASDAQ, Ultimus Fund Solutions, Fidelity, Voya Financial and Charter Financial Publishing (publisher of Financial Advisor magazine).