The ‘work-from-home’ ETF is here. Get ready for some surprises.


For all the weirdness of the past few months — the Zoom fatigue, the challenge of caring for children and pets and aging parents alongside co-workers — the coronavirus pandemic that’s kept millions of white-collar workers in their homes, not their offices, has presented new opportunities.

It seemed only a matter of time before someone launched an ETF for that, and on Thursday, that fund, the Direxion Work From Home exchange-traded fund — sporting the ticker WFH
WFH,
+0.13%

, naturally — will start trading.

As it does, a look at what’s inside the portfolio shows some surprises. For such a clearly delineated theme that squares so neatly with the reality of life for so many right now, one of the biggest ironies is how nuanced the fund’s holdings actually are.

The fund is made up of 40 equally-weighted companies ranging from old standbys like Amazon.com Inc.
AMZN,
+0.40%

and Microsoft Corp
MSFT,
+0.76%

to the lesser-known, like Proofpoint Inc.
PFPT,
-1.36%

and Perficient Inc
PRFT,
-0.75%
.

It has of-the-moment pandemic darlings, like Zoom Video Communications Inc.
ZM,
+1.00%

— and some old guards like Hewlett Packard Enterprise Co
HPE,
-0.10%
.
And its reach stretches from Shenzen, China, with companies like Xunlei Ltd.
XNET,
+2.54%

, to Cincinnati Bell Inc.
CBB,

“This is global in nature, and the benefit of what they’ve done is not just picking the poster children of the working-from-home phenomenon,” said Todd Rosenbluth, head of ETF and mutual-fund research for CFRA. “This fund gives you a mixture of up-and-comers whose business model is being driven by that theme, and some megacaps that will get stock price growth from many things. This is not really a pure-play work-from-home ETF, which I think is positive.”

Direxion says the fund will focus on companies that fall into four buckets representing sub-themes: remote communications, cyber security, project and document management, and cloud technologies.

Rosenbluth also thinks WFH should sit in an investing sweet spot. As an index-based fund, it offers more diversification, and the benefit of stock-picking from an experienced management team, than if investors were to try to select individual stocks themselves.

But it’s a lot less idiosyncratic than many actively-managed funds, most notably some of the ones run by a company like ARK Invest, which represent strong convictions by a small management team about clear winners among innovative technology leaders.

Related: Wall Street’s road warriors have spent the past three months grounded. How’s that working out?

Still, this ETF, like any fund, will have to prove itself. “I don’t think any investors would dispute that we are going to be working from home and thus using the benefits of cloud computing and telecoms,” Rosenbluth said in an interview. Investor interest and flows into the fund will likely be robust because most people agree with that thesis, he noted.

But what will keep people invested is the performance of the individual companies, and thus the fund’s overall returns, Rosenbluth said.

As ARK’s CEO, Cathie Wood, told MarketWatch in early June, even her team struggles to understand how much of a moat some of the early technology winners really have.

WFH will charge a 45-basis point fee, track the Solactive Remote Work Index, and rebalance semiannually.

See:The first — and only — negative-fee ETF didn’t make it. Here’s what that tells us about investing.



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The first — and only — negative-fee ETF didn’t make it. Here’s what that tells us about investing.


In early 2019, when the first negative-fee exchange-traded fund launched, it seemed only logical: the culmination of a steady march lower for fund management fees, until the only place left to go to lure prospective investors was below zero.

Logical, perhaps, but not convincing. The fund, the Salt Low TruBeta U.S. Market ETF
LSLT,
-1.25%

, attracted only about $9.3 million in its first year in existence. In June, its issuer, Salt Financial, announced the fund, and a companion, the Salt High TruBeta U.S. Market ETF
SLT,
-0.91%

, would be acquired by Pacer Advisors.

For Tony Barchetto, one of two of Salt’s co-founders, the pair’s short lives have been more a learning experience about how new funds find interested new investors than about how frugal those would-be customers are.

“When we created the fee structure we knew it was a bit radical, but that was the point,” Barchetto said in an interview. “People kept hearing about fees. But it’s more about value than cost, and our experiment showed that.”

Related:These are the companies that open — and close — the most ETFs

While Barchetto continues to believe the funds’ approach provides plenty of value — he and his co-founder, Alfred Eskandar, will continue to manage the indexes behind the funds in partnership with Pacer — he thinks the biggest challenge is in getting that story, and the funds themselves, to interested investors. “What held us back is distribution,” he said.

The asset management industry is dominated by big players that offer both financial products and the means for investors to access them. The “Big Three” — Vanguard, BlackRock
BLK,
-0.25%

, and State Street Global Advisors
STT,
+3.15%

— get lots of attention for holding roughly 80% market share, according to many estimates, of assets under management in the ETF ecosystem. But just as problematic, according to Barchetto and other observers, is allowing small funds access to platforms run by advisor-dominated companies like Schwab and Morgan Stanley.

Salt’s sales pitch was well-received, Barchetto said, but ultimately, if advisors or end investors couldn’t access a way to invest in the fund, that meant nothing.

See:Are ETFs safe… for retail investors?

“It’s a chicken and egg problem,” said Todd Rosenbluth, head of ETF and mutual-fund research for CFRA. Funds must meet a certain threshold of assets under management and tenure in order to be included on many platforms, but without access to the platforms, they generally can’t raise those funds or stay around for long.

“For a new ETF from a small provider to come to market and be successful, it needs something eye-catching to break through the crowd,” Rosenbluth said. “There’s a reason why every year hundreds of ETFs close.”

Rosenbluth made a public mea culpa on Twitter when he read of the Salt acquisition.

“I just thought investors were so cost-conscious,” he told MarketWatch. “The data shows that so much money is going into products that are 20 basis points less, 30 basis points less, (than competitors) and survey after survey confirms that investors are choosing fees as the most important metric.”

But both he and Barchetto point to an increasingly bifurcated ETF market in which the most basic products — those that simply track a straightforward index like the S&P 500
SPX,
-0.56%

, for example — are chosen based on fees, while other more exotic products, seen to add “value,” as Barchetto put it, can charge slightly more. One example, Barchetto noted, might be the “Innovator” lineup of annuity-linked products profiled by MarketWatch in 2019.

As to the question of distribution, Rosenbluth thinks the path taken by Salt’s managers, to allow not-quite-at-critical-mass funds to be acquired by a larger company with a better grasp on distribution, may be the future for smaller, independent issuers. (It’s ETF industry thinking that a fund must gather about $50 million in assets to be profitable.)

For his part, Barchetto believes smaller players with innovative ideas may stick to creating the intellectual property behind fund indexes, and leave the administrative headaches to the bigger institutional players.

“ETFs are cheap to get into but not cheap to execute on,” he said. “For the true independent, unless you have something real flashy that’s going to make the news, doing it yourself is hard.”

See:Time, money, and effort, and then your great ETF idea gets ripped off



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Vanguard Extended Duration Treasury ETF: Expect It To Remain Rangebound In The Next Year (NYSEARCA:EDV)


ETF Overview

About 8 months ago, I have written an article to analyze Vanguard Extended Duration Treasury ETF (EDV). At that time, I was bearish because I thought the economy will gradually re-accelerate, especially after the trade deal between China and the U.S. is signed. However, the outbreak of COVID-19 has changed the macroeconomic outlook. Therefore, it is time for me to write an article to discuss the outlook of EDV again. EDV has little credit risk as its portfolio consists of U.S. treasuries that are backed by the full faith and credit of the U.S. government. Since the Federal Reserve will likely not raise its interest rate before 2022, and that it will not pursue negative interest rates, EDV’s fund price will likely be rangebound in the near term. Meanwhile, investors will be able to earn some interest income with an average yield to maturity of 1.5%.

Data by YCharts

Fund Analysis

EDV is very safe with extremely low credit risk

EDV tracks the Bloomberg Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. Therefore, its portfolio consists of mainly U.S. treasuries. U.S. treasuries are likely one of the safest bonds to hold on earth now as they have the best credit ratings. Since the formation of the U.S. government back in 1776, the government has never failed its lenders. In a post-COVID-19 world, we favor U.S. treasuries over government bonds issued by other emerging markets. Not only because most emerging markets have inferior credit ratings than the U.S. government, the U.S. has much better healthcare resources than many emerging markets. This is important because the U.S. has likely already passed the peak of the pandemic, while many other emerging markets have yet to reach the peak. Therefore, we think the economy in the U.S. will recover much more quickly and hence support its credit rating.

Source: Vanguard Website

EDV’s long average effective maturity year means its interest rate risk is high

EDV consists of U.S. treasuries that have long duration to maturity. As can be seen from the chart below, 100% of the treasuries that EDV owns will mature 20 to 30 years from now. In fact, it has an average effective maturity year of 25.3 years. Unlike short-term bonds, long-term bonds are much more sensitive to the change of interest rates because rates could change dramatically in the next 20 to 30 years. In a rising interest rate environment, bond value may decline dramatically. On the other hand, bond value will rise in a declining interest rate environment.

Source: Vanguard Website

The question is what the rate environment will be like in the next few years. Fortunately, we do not think the Federal Reserve will be in a hurry to move to raise its interest rate anytime soon. In fact, the Federal Reserve projects that interest rate will remain near zero at least until 2022. This is because many sectors are still hurting from the outbreak of coronavirus, and it is important to keep the interest rate low in order to support many suffering industries. Therefore, this low interest rate environment will likely stay for a lengthy period of time unless a vaccine is developed. This will likely not happen at least 1 or 2 years from now (perhaps even longer). For investors wanting capital appreciation, we do not think EDV is a good choice either. This is because the Federal Reserve has made it clear that it will not lower its rate into negative territory. Therefore, EDV’s fund value will likely be rangebound in the next 1 to 2 years.

Investor Takeaway

We think EDV’s fund value will be rangebound in H2 2020 and 2021. Meanwhile, investors of EDV will receive interest income with an average yield to maturity of 1.5%. Therefore, this may still be a good fund to own and earn some interest income in the near term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.





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First Trust Nasdaq CEA Cybersecurity ETF: Strong Industry Fundamentals But Richly Valued Already (NASDAQ:CIBR)


ETF Overview

First Trust Nasdaq CEA Cybersecurity ETF (CIBR) owns a portfolio of U.S. cybersecurity stocks. This industry is becoming increasingly more important in a post-COVID-19 world as more employees work from home. The industry should be able to ride this tailwind as the industry is expected to grow rapidly in the next few years. However, CIBR appear to be more expensive than the S&P 500 Index right now. Therefore, we think a pullback will create a better buying opportunity.

Data by YCharts

Fund Analysis

Portfolio construction

CIBR seeks to track the investment result of the Nasdaq CTA Cybsersecurity Index. The Index includes companies classified as “cybersecurity” companies by CTA. In order to be classified as cybersecurity companies, these companies must meet one of the following elements:

(1) Focused on developing technologies that are designed and implemented to protect computer and communication networks from attacks.

(2) Involved in the deployment of technologies for cybersecurity industry use.

(3) Focused on the protection of priority data from being accessed by unauthorized external parties.

Besides meeting one of these 3 elements, companies must also have minimum market cap of $250 million, and minimum 3-month average daily dollar trading volume of $1 million. The result is a portfolio of about 40 stocks. As can be seen from the table below, its top-10 holdings represent about 50.5% of its total portfolio.

Source: First Trust Website

Cybersecurity is becoming increasingly important

Cybersecurity services and products provided by stocks in CIBR’s portfolio are becoming increasingly important for businesses and individuals as more and more business transactions and activities are done digitally. Therefore, it is extremely important to block any cyber attacks in order to protect important data and information. This is becoming even more important in a post-COVID-19 world as many employees work remotely from home to access important company information.

This market is expected to continue to grow rapidly

We think CIBR is a good investment vehicle to participate in the trend of cybersecurity growth.

As can be seen from the chart below, global cybersecurity spend is expected to reach $270 billion in 2026. This is much higher than 2019’s $159 billion. This is equivalent to a growth rate of 70%. In terms of growth annually, money spent on in-house cybersecurity products and services is expected to grow 7.2% annually between 2018 and 2026. Similarly, I.T. spending on external cybersecurity products and services is projected to grow by 8.4% annually in the same period.

Source: Forbes.com

CIBR is trading at a premium

CIBR has delivered a total return of 73.34% since its inception in 2015. This is slightly better than the S&P 500 Index’s return of 71%. However, CIBR’s forward P/E ratio of 24.29x is much higher than the ratio of 22.70x of the S&P 500 Index. Similarly, CIBR’s price to sales ratio of 3.34x is much higher than the S&P 500 Index’s 2.01x. Therefore, CIBR appears to be trading at a premium. However, given CIBR’s good growth outlook, we think this is still a good fund to consider if there is any pullback.

CIBR

S&P 500 Index

Forward P/E Ratio

24.29x

22.70x

Price to Sales Ratio

3.34x

2.01x

Dividend Yield (%)

1.20%

2.19%

Source: Created by author

Risks and Challenges

Concentration risk

CIBR’s top 10 holdings represent about half of its portfolio. Therefore, the fund is exposed to concentration risk if a few of its top-10 holdings underperformed.

Higher expense ratio

CIBR’s expense ratio of 0.60% is higher than other funds that tracks the broader technology index. For example, its expense ratio is higher than Vanguard Information Technology ETF’s (VGT) 0.10%. Nevertheless, CIBR’s expense ratio is comparable to other cybersecurity ETFs such as ETFMG Prime Cyber Security ETF’s (HACK) 0.60%.

Investor Takeaway

We like CIBR’s future growth prospect and think any pullback of its fund price will create a good buying opportunity for investors to participate in the growth trend of cybersecurity sector.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.





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A first-of-its-kind racial empowerment ETF is ‘flying under the radar.’ Maybe it shouldn’t.


Consider an exchange-traded fund that’s small, with only $4 million in assets after nearly two years in existence, and charging a high management fee — 76 basis points — that enables investors to access a feel-good strategy that’s very of-the-moment.

If that sounds iffy, think again. The fund, the Impact Shares NAACP Minority Empowerment ETF
NACP,
+1.26%

, is the only financial product that explicitly addresses issues of racial inequality, doing so with the backing of one of America’s oldest and most prestigious civil rights groups.

It’s also a blueprint for how mission-driven organizations can engage the corporate sector in making social change, especially around racism, an issue that often seems forgotten in a financial services landscape crowded with other “socially responsible” plays. And at a moment when America’s attention is squarely on racial justice, it may check investors’ boxes.

“As people lose confidence in Wall Street’s ability to generate alpha, they’re going to look for other ways to derive value from their capital,” said Ethan Powell, founder of Impact Shares, a first-of-its-kind nonprofit ETF provider.

Socially responsible investing, Powell thinks, is “a natural extension of that, but the financial services industry doesn’t have the acumen for it.”

That’s where the National Association for the Advancement of Colored People, founded in 1909, comes in. The organization has a long history of corporate engagement, said Marvin Owens, its senior director for economic programs, but saw involvement with the ETF as a way to spin that work forward.

The NAACP developed a list of 10 principles, called “screens” for the purpose of the ETF, ranging from the familiar, like board and executive team diversity, all the way to lesser-known ideas like how companies address the digital divide and support local community development programs.

Index and research provider Morningstar developed an index around those screens, and Sustainalytics, a third-party vendor, does the due diligence on companies inside the index.

In theory, the NAACP should share in a cut of the ETF’s profits, but that won’t be possible until it reaches $20 million in assets.

But for Owens, the work put in to create actionable ways of assessing companies has been more than worth it. Corporations often support the NAACP in ways he called “transactional,” such as paying for ads or buying tables at events.

“The ETF has allowed us to engage corporations in discussions: what is your commitment to a diverse board, to supplier diversity, and so on,” Owens told MarketWatch. “With corporations that have funded us historically, the ETF has allowed us to step back and say, we thank you for your support, but the data shows this or that. It gives us credibility, takes away from the idea that the NAACP can be paid off.”

Read next:Do well by doing good with this fund that supports freedom and human rights

The match between ImpactShares and the NAACP came courtesy of the Innovative Finance team at the Rockefeller Foundation, which has funded ImpactShares, as well.

Lorenzo Bernasconi, that group’s managing director, also applauds the advocacy that the index framework permits, but thinks the ETF can unlock even more opportunity. “We face a whole set of large environmental and social challenges which government and philanthropy cannot address alone,” Bernasconi said. “The ETF builds on two major trends in capital markets: an interest in impact investing and a shift toward passive investments.”

Many smaller fund issuers face a vicious circle: they can’t attract assets unless they have enough assets to convince would-be investors the fund is a safe bet. That’s a real concern for Ethan Powell, who says that, as the manager of a nonprofit, he works “pro bono” and all his vendors offer concessions of some sort.

For the deep-pocketed Rockefeller Foundation, however, Impact Shares isn’t just a feel-good handout.

“We make bets on ideas we think have a $1 billion-plus opportunity,” Bernasconi told MarketWatch. “We take a patient view on these things and understand it’s going to take time. If anything, what we see today in the U.S. is that the mission of the NAACP is more critical than ever. This is a volume game: once you get close to critical volume, the floodgates open. We have every confidence that as the market becomes aware of products like this, over time it will reach the scale it needs.”

Related:The eviction crisis is starting to look a lot like the subprime mortgage crisis

Perhaps a bigger surprise is that the ETF can be more than a feel-good handout for the investing public, as well. While its index may serve as a document of which companies do the right thing — and which ones don’t — it’s also a list of some well-known strong performers, from Apple Inc.
AAPL,
+2.84%

to the Atlantica Sustainable Infrastructure YieldCo
AY,
+1.16%

, noted Todd Rosenbluth, head of mutual fund and ETF research at CFRA, which has a five-star rating on the fund.

In the year to date, the fund is up 4%, while the S&P 500
SPX,
+2.62%

is down 1.3%. Over the past 12 months, the fund has gained 19%, beating the 12.8% increase in the broader market.

“This is clearly flying below the radar for investors,” Rosenbluth said. “This fund exists for the right reasons and should get more attention.”

For all the tragedy of the past few weeks, as anger in America over the treatment over people of color has boiled over, everyone involved with the fund hopes it’s an opportunity.

Powell believes critical mass in investment dollars into socially responsible funds is proof of a real desire in America for change. “On a daily basis people of color face structural obstacles that aren’t as overt as putting a knee on someone’s neck,” he said. “The fund itself represents a structural change in how we do capital allocation and hopefully is a call to action to corporate America. This is a way to create a virtuous circle of capital.”

For his part, the NAACP’s Owens says social change, in contrast to environmental advocacy, is also a tool of investing strategy, “is much more organic. You have to feel it and see it. That’s why I think what’s happening in the country right now is an inflection point that will cause more attention to come to this.”

Read:Four years, $13 million and dozens of hands: How ‘affordable housing’ gets made in America



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