The Façade of Trendy ETFs
Not enough time to research, buy, sell, and balance investments in dozens or hundreds of stocks? That’s why the financial industry has industry-specific ETFs (Exchange-Traded Funds)!
I am not a financial advisor so this should not be taken as financial advice for you; this is just what I discovered about my own interests.
When I was getting started with investing on individual stocks and ETFs instead of dumping everything into one Vanguard or Fidelity retirement fund, I was at a loss about what to do.
Consider if you wanted to invest some money in 20 to 30 popular companies such as Chipotle. A single share of Chipotle is over $1,550 today. To invest in 20 stocks, you either make an outsized Chipotle investment, put 30k into one industry, or use a platform for fractional shares. The classic use-case for ETFs is to find which ones include Chipotle (etf.com/stock/CMG), and invest in one of those based on their holdings, strategies, performance, and fees.
For me, one draw of ETFs was investing in an emerging industry where the leading businesses may change quickly, and new stocks might be listed this year. Examples would be $QTUM for quantum computing, $NZRO the “Halt Climate Change ETF”, $URA for nuclear energy, $HOMZ for residential construction, with tons of other options available from the financial companies which manage these ETFs.
A funny thing happened when I looked into the actual stocks. Consider the two quantum startups which can be publicly traded: IonQ and Rigetti. Out of 74 stocks in the QTUM portfolio, about 3.23% is invested in those stocks, an increase from earlier this year.
Compare that to 3.55% in Nokia and Blackberry. Are they quantum computing leaders? It’s complicated — Nokia owns Bell Labs. But there’s also an investment in Orange (France Télécom), mega-corps which expressed interest in quantum (Google/Alphabet, Microsoft, Baidu, Alibaba), conventional chip makers (NVIDIA, Texas Instruments, AMD, Taiwan Semiconductor, ASML) and military contractors (Lockheed Martin, Booz Allen Hamilton).
None of these are financially irresponsible, but there’s little reason to think of their combination as a ‘quantum ETF’… if the quantum compute market were to double or halve tomorrow, the value would move only a small amount.
Next, consider NZRO’s “halt climate change” mission. Would you expect to be investing in Adobe, Apple, Autodesk, Cigna, Cisco, Facebook, Google, Intuit, MasterCard, McCormick, Microsoft, Moderna, Netflix, Oracle, Pfizer, Salesforce, Unilever, United Health, and Visa? Just from these and a few other companies which I could identify, 42% of the holdings were in stocks which stick out among those with a more direct focus on alternative protein, climate, clean energy, water, or waste.
Both of these ETFs are really general financial products. The names appear to be designed for search discoverability or investor appeal, rather than betting money on finicky markets. Overall growth is important when investors research a product, so naturally these ETFs’ management use major tech stocks and a few appealing investments to appear in the right places on the right rankings, not to lose money on risky markets.
A good portion of quantum research has not even risen up into becoming public companies yet, so it’s also up to me as a potential investor to know that there’s no way to invest in 100s of quantum companies. Or I could invest in Special Purpose Acquisition Companies (SPACs) — and there’s an ETF for those, too...
At the end of the day, there are a lot of ways to take on needless risk in the market. Look out for ETFs that try a little too hard to fit the trends!