Last week I attended the IMN Global Indexing and ETFs conference in Dana Point, California. One excellent benefit of living in North County San Diego is that many investment and financial planning conferences come to San Diego or Orange County. That makes it easy for me to attend.
I have been to this particular conference for four straight years now. In the past it has given me good insight into how the business behind ETFs actually works. This year, I learned about some funds that are worth a closer look. Those funds are: MOAT, ESPO, and IPAY. All three of these funds are thematic ETFs.
Thematic ETFs invest in companies that fit a certain story line. Having an investing story to tell increases the ability of the fund to gain assets. In other words, it’s easier for the fund to get some publicity, which leads to investors. If an ETF doesn’t attract enough investor money, it may not be profitable for the issuer, and they may decide to close it down. When investing, we want to make sure we are investing in funds that are large enough that they are not at risk of being shut down.
The downside of thematic ETFs is their investing story line may be too trendy and not have the staying power you need as a long term investor. Some examples of this are GNRX (a generic drug ETF), OBOR (China’s One Belt, One Road initiative ETF), or SLIM (an obesity ETF).
Let’s take a look at how the three thematic ETFs I learned about at the conference compare to some broad stock ETFs. We will compare against the old standard, SPY (S&P500 ETF), CAPE (an ETF that holds 4 sectors out of 9 based on value), and MTUM (a momentum smart beta ETF).
Our first fund is MOAT. 
If you have read about Warren Buffet and his partner Charlie Munger, then you are familiar with the idea of companies having a moat. Their idea is to invest in companies that are able to protect their competitive advantage. They like it when it is difficult for a new company to easily replicate what the successful business is doing. An example would be Google. It would be very difficult for a new search engine to displace Google.
The MOAT ETF takes this idea and applies it based on Morningstar’s equity research. Morningstar determines which companies have a competitive advantage and buys the stocks with the lowest price to book value. If the price of the stocks increases and is no longer a good value, it is sold and replaced with another stock that meets the characteristics.
Overall, MOAT is an interesting idea, but I think it owns too many stocks with 52 currently. I think it would be a better investment if it toughened it’s definition of wide moat and invested in fewer companies. Also, just because a company is insulated from competitors, doesn’t mean people are interested in investing in it. These companies could just as easily be thought of as boring companies that don’t need to try hard or improve shareholder value.
The next fund is ESPO. 
The ESPO fund is the VanEck Vectors Video Gaming and Esports ETF. This ETF tracks an index of companies that get at least 50% of their revenues from video game development, Esports (including events), and related hardware and software.
What are Esports? Competitive video gaming. Esports have been a quickly growing industry the past few years. The performance of this ETF mirrors that.
I have seen Esports competitions broadcast on television. These broadcasts are of professional leagues featuring teams from around the world. Esports is a global industry and big events sell out huge arenas. It is definitely a growing industry. The question is will it continue to grow? My answer – most likely yes.
Our third ETF is IPAY.
IPAY invests in companies that provide payment processing services, applications, and solutions, or provide software, networking or credit card processing. The companies must have a market cap of at least $500 million to enter the fund. There are many startups in this industry and the minimum market cap means the fund only invests in established companies.
The theme of this fund is the ongoing shift away from cash and towards mobile payments. Mobile payments is more than credit cards (although in my eyes a lot of these mobile solutions are really just software placed in front of credit card processing.)
The mobile payments industry is a lucrative and therefore competitive field. These businesses work by basically writing a piece of software that enables them to become middlemen and take a percentage of the mobile transactions that occur each day. It’s a huge market and you can see why there are lots of startups trying to create a technology that catches on.
Currently, there are a lot of competing technologies and none are revolutionary. I expect a lot of consolidation to occur in the coming years as some of the technologies become more established. The trend towards mobile payments should continue and therefore this thematic ETF should do well in the coming years.
Recent results chart: (For January 2016- May 2019. IPAY began trading in August 2015. ESPO began Nov. 2018.)
| Ticker | Initial Balance | Final Balance | Avg Return | St Dev | Max drawdown | Sortino Ratio | US Mkt Correlation |
| IPAY | 10000 | 18109 | 18.98 | 15.97 | -17.97 | 1.75 | 0.88 |
| MOAT | 10000 | 16153 | 15.07 | 14.36 | -10.34 | 1.53 | 0.91 |
| MTUM | 10000 | 15960 | 14.66 | 12.04 | -15.44 | 1.73 | 0.86 |
| CAPE | 10000 | 15670 | 14.05 | 12.63 | -15.27 | 1.55 | 0.96 |
| SPY | 10000 | 14392 | 11.24 | 11.8 | -13.52 | 1.27 | 1 |
These returns are only for three years time because the thematic ETFs are new. The mobile payments ETF has had the best returns recently, but is also the most volatile. The standard deviation column shows IPAY is more than 4% more volatile each year than the S&P500 ETF (SPY). The MOAT ETF has had a better return with lower volatility than the S&P500. That is a small bit of evidence that the moat story line could be true.
How do Thematic ETFs fit in your portfolio?
Thematic ETFs should be used as a “satellite” to your core equity portfolio. You may get some extra return by adding a thematic ETF to your portfolio, if the story line holds up. The majority of your stock portfolio should be in a broad market fund, with the thematic fund(s) playing a bit role.
If you would like to talk about this investing idea or other financial planning topics, give us a call at (760) 651-6315.
Disclosure: Investing has risks. This blog post is not a recommendation to buy any of the mentioned funds. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed.