#Thematics #Trends #Instantdiversification #Lazyexposure
Agreed @suttree Owen Rask did an excellent podcast with Kanish Chugh from ETF securities on their latest ETF offering - SEMI. The podcast also directs listeners to the Megatrends white paper available on ETF securities website – which is well worth a quick read. My spin on this paper and thematic investments, specifically SEMI are discussed below:
The thematic white paper defines a megatrend as:
“A megatrend is a long-term structural shift that transforms economies.”
The changes are enduring – e.g. printing press, electricity, telephone, steam engine, cotton mills, motorised car, computers, internet etc….
As the paper states megatrends can shape markets and investment results and peoples futures.
Modern fund managers have set up whole portfolios around this concept of the megatrend. Famous pioneers include Cathie Wood with her Ark Invest fund. She has been pooling the best and brightest minds from various industries to provide insight into where human endeavour is headed. Her ideas are often controversial and opponents quite literally make a living jeering and betting against her positions. Currently, short sellers have a $US 2.7 billion bet against her flagship ETF. Tuttle Capital management has even filed for an inverse ARK ETF which will mirror the opposite positions to Ark Invest.
Her fund has frequently been in and out of controversial stocks like Tesla. Her most bold prediction to date has been around Bitcoin. She has suggested institutional investors globally will start to diversify portfolios not just using traditional measures such as gold but by hedging and allocating up to 5% of their funds into cryptocurrencies like Bitcoin. This mass global monetary shift would see 1 bitcoin increase its value 10-fold from $45,000 to around $500,000 per bitcoin. I might have to get that wallet fear sorted out and tattoo my password on my arm.
Whether you believe in megatrends and advocate for fund managers such as Cathie or not, it is impossible to deny the changing winds and popularity of thematic ETFs.
ETF securities lumps its megatrend portfolios into 4 categories:
1. Transformative Technology: AI, cloud computing, robotics, 5G, automation and machine learning
2. Society & Lifestyle: aging, growing middle class and rise of social media
3. Health and Wellness: biotech including, mRNA, vaccines, genomics and gene editing
4. Environment & Resources: Renewables and battery tech
The industrial revolutions are broken down into 4 stages:
1. Mechanization and steam and water power
2. Mass production assembly lines using electrical power
3. Automated production, IT systems and robotics
4. Smart factory, autonomous systems, IoT and machine learning.
A great example of 4 Is what is underway in Amazon warehouses. There are several documentaries and lots of information available on the smart warehouses Amazon is developing. Everything is moved around and collected by robots. AI helps to identify product locations in the factories. However humans are still used to physically pick up items and pack them. This largely is due to the imperfections of the current robotic arm extensions as they still struggle to pick up different shapes and sizes at speed. Nothing compares to the good old fashioned hand.....yet. I am sure this will be perfected in the not too distant future and further remove the need for human intervention.
Other examples are self-driving cars and trucks and drones that can deliver to your door.
The second megatrend society and lifestyle can encompass social media, streaming services, ageing populations and societal shifts like more women in the workforce. These fundamental shifts in the way we live mean opportunities in daycare, robotics and healthcare to plug labour shortages etc…
The third megatrend health and wellness has huge potential. Strawpeople have been discussing this theme recently with the avid interest in companies involved in Cognitive Wellness and Alzheimer’s identification and monitoring like Cogstate. Lifestyle apps like Catapult or Apple for monitoring performance and wellness. Companies like Resmed want to assist by helping us to sleep better. These megatrends are fascinating and have a universal and relatable element.
The white paper states that healthcare spending is growing faster than GDP in most countries. We are all nationally and individually clearly invested in this megatrend. mRNA vaccines are now a universal language – are you getting Zeneca, Pfizer or Moderna, it would be hard to believe this shift was possible in 2017.
The fourth megatrend is based around scarcity. The environmental and resource theme is incredibly topical right now. From renewables – Equity Mates just did a 2 podcast series this week to help explain the trends in energy. Novonix has taken off in the last 6 months with its battery storage tech promising less dependence on fossil fuels. Companies like Orocobre and Galaxy have joined forces and been lifted by the lithium trends. Major Australian companies like FMG are protecting future business prospects by venturing into green hydrogen. Even small caps like EVS have recently gained a lot of attention on Strawman. Companies that work toward minimizing environmental impacts and protecting resources like water are becoming a megatrend. Just not Phoslock its still in a trading halt and crap! (wait can I get sued for that…….wait IMO should cover me). You too can become an individual megatrend yourself - if you can drop the term ESG into your daily conversation.
The idea of investing in thematics is that you can access growth:
Like buying general motor shares in the early 1900s or shares in Softbank in the 80s or Microsoft in the late 80’s or Alibaba in 2014.
You can bet on disruption – you believe in the electrical vehicle there is a thematic out there for you, you believe that semi-conductors are the new oil, then you can diversify and bet on this tech.
Thematic ETFs like SEMI allow you more targeted exposure than a general index or specialized tech index. SEMI offers pure play microchip investment concentrating on four main areas:
1. The semi-conductor designers: Nvidia and AMD (they do not make microchips themselves – haha maybe one day Brain will find its way into this class
2. The Foundries – Semiconductor factories: TSMC (they do not design the chips, they take designs from other companies and then make the semi-conductors for them).
3. Integrated device manufacturers – companies that design and manufacture microchips like Intel (most companies don’t do both because of the cost involved)
4. Equipment makers for the foundries – They make the machines that are used in the factories that make the chips. Companies like ASML (lithography machines) and LAM (etching equipment)
Lithography equipment is so specialised that individual machines cost $100 million plus. These machines use ultraviolet light to print patterns on microchips. Foundries also cost 10’s of billions of dollars to build which makes it hard for new competitors to enter this market.
The SEMI ETF contains the top 30 global companies across the developed world including Tawain and Korea. Semiconductors control the flow of electricity in modern electrical equipment. They are made from silicon sand and compressed into thin wafers with millions or billions of components called transistors. Modern semi-conductors are so small that the machines that now manufacture them need to be accurate to the atomic level.
As Owen and Kanish discuss in the podcast interview manufacturing rooms are designed to ensure that no dust particles are present as dust specs are often bigger than the transitors in the semi-conductor.
There is a 0.57% management fee with the SEMI ETF. To be included in the ETF companies must have a market cap of US$ 1 billion and a minimum daily average trading volume of US$ 1 million over 3 months to ensure that it remains liquid for inclusion in the ETF. Weights of each stock are capped at 10%.
So why buy an ETF? Aren’t you just taking on the winners and weighing them down with the losers. This was an excellent point suggested to me by our current illustrious Strawman leader Canadian Aussie. I agree in part. My bend would be toward the individual companies ASML, LAM and TSMC in this space however I am time poor and I haven’t researched ways to invest directly in these companies yet! So for now I’ll take some exposure over no exposure.
Disc: Held Strawman and as a satellite in my SMSF
