Donkeys or Unicorns

“Canada’s Donald Trump” lists internet giants ETF
O’Shares, the issuer owned by and named after Kevin O’Leary, “Canada’s Donald Trump” ( Hefeatures on a reality TV series), is listing an ETF that tracks internet giants. The O’Shares Global Internet Giants ETF (OGIG) will self-index and track “stocks exhibiting quality and growth characteristics in the ‘internet sector’, as defined by O’Shares,” the prospectus says.

OGIG starts by identifying companies in the following industries: Internet Software & Services, Systems Software, Application Software and Internet & Direct Marketing Retail, using O’Shares own definition of those sectors. To qualify within those sectors, companies must be generating at least 50% of their revenues from those sectors.

Within those sectors, companies are chosen based on quality and growth. Where quality is determined by “cash burn rate”, the monthly rate that a company uses shareholder capital, and growth is measured by revenue growth.

Companies are then weighted on a “modified market capitalization,” basis, the prospectus says. The modification involves melting together market cap and growth, subject to diversification constraints.

OGIG will charge 0.48% a year.

Analysis – unicorns and self-indexing
The decade-long bull run has been driven by tech stocks – particularly those in the internet “sector” (FAANGS). Today, a battalion of unicorns frolic across the stock market, from China’s Alibaba to chronic money-loser Netflix. With a long-hibernating bear market now looming, we could soon find out which tech stocks are real unicorns and which are just donkeys with plungers stuck to their foreheads. With this in mind, it’s the great wisdom of OGIG that it puts in place a quality screen that deliberately removes proud money losers from the index. And given the timing of the listing, this makes good sense.

If I had a concern about this product, however, it would be its use of self-indexing. To me it’s a bit unclear why – other than profit margins – O’Shares chose to self-index. It’s also unclear if O’Shares has the competence to index (including the necessary Chinese walls). The prospectus contains the following passage, which is unusual in ETF prospectuses:

“Risks related to the Index Provider… the Index Provider does not guarantee the quality, accuracy or completeness of data in respect of its indices and does not guarantee that the Target Index will be in line with its described index methodology.”

Given that OGIG comes with a 0.48% fee, it’s unusual that there is no external index provider.

Invesco changes ISINs and rebrands all US ETFs
Invesco is renaming all its US ETFs, putting them under the Invesco brand name and changing their ISINs. The name changes come as part of a far-reaching rebranding exercise in the US and Europe. For a full list of data changes see here.

BlackRock brings fees in line with competitors
BlackRock has lowered the fees on eight of its core European and emerging markets ETFs, bringing its headline fees into closer combat with its competitors. The correlation between fees and flows suggests that profit margins are going to be under increasingly heavy pressure, particularly for plain vanilla ETFs.