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Source: Bruno Scramgnon
A few weeks ago after a subscriber request, I took a deep dive into the Global X Robotics & Artificial Intelligence ETF (BOTZ).
If you are not familiar with it, BOTZ is a thematic ETF that focuses on a subset of disruptive technologies, robotics and artificial intelligence. While it’s a very attractive and an interesting idea, what we found is that most investors would be better suited invested in a broader technology fund.
After the article’s publication, I had another reader ask me about (DTEC), the ALPS Disruptive Technologies ETF.
What’s interesting about this ETF and why I wanted to take a look at it is that while it’s still focused on innovation and disruptive technologies, it’s much more broader and focuses on 10 industries instead of two.
Is this a better idea? Let’s take a look.
Investment Case
I do not believe I covered any ALPS products in the past, however I’m familiar with the name. Overall, while the website is not as clean or fluid as the iShares website, ALPS does provide all of the content you want to see and I give them a lot of credit.
The investment case for the fund is to take advantage of global companies that enter traditional markets with new forms of production and distribution, which are likely to disrupt an existing market or value network.
The fund is focused on generating alpha over the long term by investing in a “global all-cap equity” style, in an equally weighted portfolio of 100 stocks in ten disruptive themes.
Source: ALPS Funds
Fund Basics
- Sponsor: ALPS Funds
- Index: Indxx Disruptive Technologies Index
- AUM: Approximately $53 million (3/29/2019)
- Historical Style: Global All-Cap
- Investment Objectives: The fund seeks to track the investment results of an index composed of global companies that enter traditional markets with new digital forms of production and distribution and are likely to disrupt an existing market or value network.
- Number of Holdings: 100 securities.
- Current Yield: .29%. 30-Day SEC Yield
- Inception Date: 12/29/2017.
- Fees: .50%.
Source: YCharts & ALPS
The Index and The Fund
As I discuss in many articles, one of my challenges with ETF sponsors is to find the balance between what I should expect from them vs. what they can provide. In the case of ALPS, I have to give them a lot of credit.
Despite being a relatively small sponsor in the ETF space, they provide a lot of information including data and characteristics of the underlying index! Granted, the data is a bit older… but it’s there!
If you are interested in investing in this ETF, you can find the underlying index methodology here, and the main index page with the fact sheets, methodology, and index values here.
The Index
The ALPS Disruptive Technologies ETF follows the Indxx Disruptive Technologies Index.
Even though the ETF was launched in 2017, the underlying index has been around since 9/20/2003 and is currently made up of 100 holdings.
INDXX further does a good job providing the information about the index, the constituents and the underlying methodology.
So, let’s dive into it.
The index starts with the investable universe of stocks that are either in developed or emerging markets.
The minimum market capitalization is $500 million and must have a six-month average daily turnover of greater than or equal to $2 million and a free float equivalent to 10% of shares outstanding.
INDXX then breaks down the investable universe to screen out companies that fall into the 10 themes: 3D printing, clean energy and smart grid, cloud computing, cybersecurity, data and analytics, fintech, healthcare innovation, Internet of Things, mobile payments and robotics and artificial intelligence.
Source: INDXX
Companies from the list that derive revenues greater than or equal to 50% from the themes above are considered “pure play” and are included in the selection list.
The top 10 “pure-play” companies from each theme are then included in the final portfolio.
What’s unique with this ETF and what we don’t find in many others these days is that the portfolio is equally weighted.
The portfolio is then evaluated and rebalanced quarterly. It’s then reconstituted annually. This is quite unique and will be a point of discussion.
Furthermore, the underlying index has the ability to review the disruptive themes and adjust them annually. As such, the hope is that if one theme has run its course, the underlying index would adjust and look for a new theme. This is another reason to consider this as a longer-term holding and very much different than from what we see in other funds.
Turning to the fund, we can indeed find that it’s very well diversified.
Looking at the top 10 holdings shows us a portfolio made up of quite a few foreign holdings. The largest domestic names are Align Technology (ALGN), Zscaler Inc. (ZS), Worldpay (WP), LendingTree (TREE), Alarm.com (ALRM), and NetApp (NTAP).
Source: YCharts
True to the index, the fund is well diversified between the themes due to the equal weighting methodology and quarterly re-balancing.
Source: Alps Funds
Despite being global, the majority of the fund is currently North American focused with more than 70% allocated to the continent.
Source: YCharts
Looking at the market capitalization, we can find that the fund is very well balanced with enough exposure to small- and mid-cap stocks.
Source: YCharts
If we dive deeper into the market cap exposure, we do find that the fund is very much tilted toward growth. This would be consistent with tech for which investors pay higher multiples, often times before any income is generated.
Source: YCharts
Despite the price per share taking a dive in Q4 2018, the fund has been fairly successful in raising and maintaining capital. Raising $53 million in just over a year for a relatively unknown sponsor is quite good, however this is still far, far, far behind what investors would consider a “successful ETF.”
The fund has managed to stay on the right side of the flows since its launch, which always is good.
Source: YCharts
Performance
Year to date, the fund has done quite well and has achieved a 21.75% total return. The price per share increased the same 21.75% as the fund has not paid a distribution. This is a very strong rebound from a rocky Q4 2018.
It has been volatile, of course, and if we look back to the previous 12 months, the fund has achieved a 9.58% total return while the price per share increased 9.22%.
As the fund was recently launched, we do not have too long of a track record. Since inception, DTEC has achieved a 15.71% total return while the price per share increased 15.33%.
Competitor wise, there are a few other “new economy” or disruptive technology funds.
The most direct competitors are the Innovator Loup Frontier Tech ETF (LOUP) and the SPDR FactSet Innovative Technology ETF (XITK). On the actively managed side, there’s another ETF which we already have covered, the ARK Innovations ETF (ARKK).
One that we can surely look at is the Global X fund we just looked at, (BOTZ) and a global go-anywhere technology fund such as the Putnam Global Technology Fund (PGTAX).
Year to date, we can find that all of the funds have done well. The actively managed ARK Innovation ETF has been the best performer however.
Going back over the last year, we find the trend continues. While the fund was outperformed by the SPDR and ARK ETFs, the ALPS fund outperformed its other peers.
Sine inception, we once again find the ALPS fund perform in the middle of the pack. While over the last 14 months or so the fund has outperformed the actively managed Putnam Global Technology and the Global X ETF, it was outperformed by the actively managed ARK Innovation ETF and the SPDR ETF.
It is quite shocking to see BOTZ lag behind so much.
Overall, the results are not too surprising. There’s a reason for DTEC underperforming other ETFs.
Bottom Line
Once again I’m quite glad I looked at this fund.
Overall, it is a very well diversified ETF with reasonable fees.
Although the fund is very new, we do have some performance numbers which have lagged other “innovation focused” ETFs. This is perhaps not surprising as the fund is equally weighted AND rebalances once a quarter.
Generally, while this is safer, you also are not letting your winners run. If I recall correctly, historically, semi annual rebalancing was the best mix as it would allow some more time for winners to run before locking in those gains.
Furthermore, we do know that all else being equal, market cap weighted methodologies performed better during bull markets…
Market cap weighting methodologies however lagged over complete market cycles.
Another thing that investors need to consider is if they are OK investing into a relatively new fund with $55 million in assets under management. This of course is a very personal choice and there’s usually no right or wrong. The downside is generally that if the fund does not raise enough capital to cover its expenses, the fund may be shut down by the sponsor and shares would be liquidated.
At this point, I would certainly consider the ALPS fund over the Global X BOTZ ETF, however I’m also quite interested in taking a look at why the SPDR ETF (XITK) outperformed.
Perhaps this was just the performance over the last 14 months? Just may be. Unfortunately we will not know until the fund has had more time. Until then, the choice is yours to decide if you need to know this to make your investment decision.
So, there you go. Thanks for reading! I hope that was helpful and look forward to your questions or comments.
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.
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