It’s the Story That Sells the ETF - Chaikin Analytics

It’s the Story That Sells the ETF

The creativity in the ETF universe never ceases to amaze. Pick a theme, any theme, and there is likely a way for you to invest in it or one is in the works. But how do you know which themes are enduring and which are hype? Can you look past the narrative?

Let’s start by saying that few, if any, of us are immune to a good story. As much as I pride myself on being disciplined and mostly technical in my analysis of the market, I have taken the bait on a good story or two. The most recent was Bitcoin in early 2018. The cryptocurrency that was taking the world by storm and was “going to replace fiat” was at the tail end of a run that took it from under $1,000 at the start of 2017 to nearly $20,000 as the year drew to a close. In early 2018, I was invited to a lunch that was hosted by a money manager who runs a crypto-focused hedge fund. This manager has a “Wall Street” pedigree, having worked at one of the largest, most successful global macro hedge funds for most of his career where he was trained by someone who many consider an investing legend. The pitch was that we were still in the “early innings” of a revolution that was going to change money itself. Not only that but the underlying blockchain technology was likely to be seen as the greatest innovation since the dawn of the internet.  

The story was compelling and the background of the person telling it made it all the more convincing. I walked back to my office, opened an account with one of the well-known exchanges and bought my first fractional amount of Bitcoin as well as some of the lesser known coins such as Ethereum and Litecoin. Over the next few months, I committed to investing a set amount of money each week into this “basket” of world-changing assets. “It’s no big deal if the price falls, I will just average in.” I went for the story. Bitcoin broke below the 200-day moving average, I bought more. I finally capitulated and sold out when Bitcoin was 50% off it’s highs. 

It remains to be seen if the hype is real, perhaps it is but there is an opportunity cost to sitting in a position that is not working. So, knowing that we are all prone to a good story, I started to think about some of the thematic or narrative-based investment opportunities that exist today. While some will be long-term winners, some will not. But the hope of the story should not replace a disciplined investment process that puts a premium on investing in the themes that are outperforming and likely to continue to do so.  

What are some of the big thematic narratives that captivate the attention of investors today? Are they worth adding to a diversified portfolio? Here are a few that are on my radar and how they stack up based on the ETF model at PortfolioWise.

Blockchain

Sticking with the theme that started my thought process on this. While we can debate the usefulness of the individual coins and if one of them will be a global replacement for fiat currency, the underlying blockchain technology is impressive to me. While many people equate blockchain with cryptocurrency, in my view, blockchain is a platform on which applications and entire businesses can be built. There are many well-known public companies that are utilizing or helping to build out the underlying technology and there is an ETF that allows investors to gain access to this theme. The Amplify Transformation Data Sharing ETF (BLOK) is an actively managed ETF that seeks to provide total return by investing at least 80% of its net assets in equity securities of companies actively involved in the development and utilization of blockchain technologies. The fund has a Very Bullish ETF Rating in our model and has been leading the SPY since March. There is a good story here in my mind but more importantly, this fund appears to be compelling. 

Cannabis

The cannabis craze is another theme that has been mostly centered around the increasing use case in the medical field as well as the legalization of marijuianna for recreational use. The ETFMG Alternative Harvest ETF (MJ) and tracks the Prime Alternative Harvest Index, designed to measure the performance of companies within the cannabis ecosystem benefitting from global medicinal and recreational cannabis legalization initiatives. Perhaps you have seen the benefits of the regular use of CBD products in your health and well being. Does that mean that this theme should be a part of your portfolio. It can be, but should it? Based on the data, I would argue that the answer is “not now.” The fund has a Very Bearish ETF Rating and has been lagging the SPY for nearly a year. 

Other Themes That Have My Attention

There is no doubt that shopping online is a secular growth theme. Despite the quarantine in place since the start of the COVID-19 pandemic, I can honestly say that I have been able to buy anything that I need over the internet and it is usually on my doorstep in short order. The Amplify Online Retail ETF (IBUY) seeks to provide investment results that, before fees and expenses, correspond generally to the price performance of the EQM Online Retail Index. The Index is a globally-diverse basket of publicly-traded companies that obtain 70% or more of revenue from online or virtual sales. The fund currently carries a Very Bullish rating but it was actually an underperformer for most of 2019, meaning it was a drag on portfolios. It is only recently that IBUY has been leading the SPY.

What about mobile payments? I am sitting on my couch and I place an order for a new shirt on my phone and pay for it with Apple Pay. When we are able to go out to dinner again, I will likely be with a group of friends where one person will pay the bill and the rest of us will Venmo our share. Clearly we want to own this mobile payments theme, let’s jump in on the ETFMG Prime Mobile Payments ETF (IPAY) which aims to capitalize on the shift from credit card and cash transactions to digital and electronic systems. Not so fast. The fund has a Neutral ETF Rating, so not bad but not great. However, IPAY lags the SPY and is currently in a downtrend. There may be a time to invest in this theme, but right now, there are likely better uses of capital. 

I could go on and on here, but the point is clear. Humans love a good story. If we didn’t, most of the entertainment industry would not exist. However, there is a difference between the narrative and the investment. That difference can usually be seen by taking an objective look at what is actually happening vs the story that we have been sold. 

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1 thought on “It’s the Story That Sells the ETF”

  1. Udayan Bhattacharya

    Thanks for the analysis 💥😺. What makes your analysis more compelling and insightful is the use of Chalkin software to chart each example for us. Really appreciate seeing that we can add a bar to gauge the relative strength vs the SPY. I wonder can we do the same with the QQQ or the IWM?.As a newbie to trading and investing I have quickly realized the importance of opportunity cost, so here is a great start position for gauging this aspect of Risk. I really look forward to getting Chalkin Analytics and attending the regular seminars too.
    Can we have more from you Can, thanks and happy Summer Udayan

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