In 2015, few investors had heard of companies like Atlassian, Veeva Systems and Twilio. Yet these firms went on to post stunning growth rates as they built ground-breaking new platforms that disrupted once-staid industries. And their shares have surged three or fourfold since then, creating tens of billions in shareholder value.
Trouble is, you won’t find firms like these in some of the major tech-focused exchange-traded funds that own outsized positions in mega-cap tech stocks like Microsoft, Apple and Cisco Systems. And that’s created an opening for other ETF sponsors to launch much more targeted funds that can profit from the upstarts that are driving today’s key tech trends.
For sure, focusing on leading-edge tech doesn’t always translate into outsized market gains. One example is the Robo Global Robotics and Automation Index ETF (ROBO). This thematic ETF launched in 2013 and has delivered a middling 7 percent annual return over the past five years. And this has come during an epic bull market for tech stocks. It turns out that particular tech trend has not been a dominant focus area for many IT budgets.
Catch the right tech theme however, and you can really strike gold. The First Trust Cloud Computing ETF (SKYY), for example, has soared at a 25 percent annual clip during the past three years. That kind of performance has helped the fund attract $2.2 billion in assets, despite a 0.60 percent expense ratio.
Hoping to ride herd on that success, a growing number of ETF sponsors have got in on the action by launching their own tech thematic products over the past year. For example, BlackRock is in the midst of launching a series of new ETFs that capture “megatrends.” The first few funds in this new family include the iShares Cybersecurity and Tech ETF (IHAK) and the iShares Genomics Immunology and Healthcare ETF (IDNA).
With 0.47 percent expense ratios for those funds, iShares clearly aims to undercut similar offerings such as the ETFMG Prime CyberSecurity ETF (HACK) and the ARK Genomic Revolution ETF (ARKG), which carry expense ratios of 0.60 percent and 0.75 percent, respectively.
Elsewhere, other ETFs have taken aim at the current era of disruptive technology trends. The WisdomTree Modern Tech Platforms Fund (PLAT), which launched in May, and the Horizons Industry 4.0 Index ETF (FOUR), which debuted in November and trades on the Toronto Stock Exchange, both invest in companies that potentially could deliver outsized growth—and investment returns—for years to come.
The WisdomTree fund is off to a slow start with just $2.6 million in assets, but it has a strong investment case.
WisdomTree’s global research chief, Jeremy Schwartz, says that a successful platform can have a very long cycle extending a decade or more. PayPal is an example of a platform that has delivered long-term upside performance. The provider of online and mobile payments was launched two decades ago and is still growing in excess of 15 percent per year. The average holding in the PLAT fund has been boosting sales at a 19 percent annual pace, and more than a third of the fund is invested in the communications services industry.
Notably, the PLAT fund avoids making outsized bets on any single dominant tech firm. Instead, the fund has less than two percent of its assets invested in any of its 69 holdings, many of which are aimed at distinct industries.