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The world's best-known sector funds cap their biggest holdings. State Street has now launched versions that remove the cap. Each one mostly owns the capped fund and then buys back what the cap took away.
State Street S&P 500 Technology, Consumer Discretionary and Energy Market Sector SPDR ETFs (XLKM, XLYM and XLEM, NYSE Arca)
The Select Sector SPDRs, XLK, XLY and XLE among them, track indices built on what the prospectus calls a “modified market capitalization" methodology. In plain terms, any company above 24% gets trimmed. And if the companies above 4.8% add up to more than half the index, that group gets squeezed back to 45%. The rule exists to keep the funds inside US tax diversification limits, and it has been quietly reshaping sector exposure for years.
The new Market Sector funds track the plain S&P 500 sector indices, which are weighted purely by market capitalisation and have no cap at all. On the uncapped technology index, Nvidia's weight has been about 19.8%. In XLK it sits at around 15%. Amazon and Tesla make up about 42% of XLY, and Exxon and Chevron about 41% of XLE, so the cap is doing real work here too.
The part worth reading twice is how the funds get there. According to the prospectus, each one invests “primarily" in shares of its Select Sector sibling, and the process “prioritizes investment in the Underlying Fund". Stocks and derivatives then top up the names the cap has shrunk. XLKM is, in effect, XLK plus a correction.
XLK charges 0.08%. XLKM charges 0.12%. Investors are paying four basis points a year to have the cap undone, by the same firm that applies it.
The prospectus is candid about the result. Each fund is “non-diversified", and "may become diversified for periods of time solely as a result of changes in the composition of the Index." Funds don’t usually become diversified by accident. This one lists the possibility in its risk disclosures.
State Street S&P 500 Consumer Staples Market Sector SPDR ETF (XLPM, NYSE Arca)
The fourth member of the State Street launch has the least to do, so I have to call it out. In consumer staples no company is anywhere near 24%. Walmart and Costco lead at around 11% and 9%, and the large names together come to about 42%, well under the threshold that triggers capping. The capped index and the uncapped one start out close to identical.
So XLPM is, give or take four basis points, XLP. Consumer staples have previously appeared on these pages in triple-leveraged form, both long and short, as a bet on the price of toothpaste. This is the opposite: a fund whose defining feature mostly doesn't apply to it, tracking a sector where nothing much happens. It will probably attract very little money. The people who buy it will get exactly what they expected.
Tuttle Capital Space Data Centers ETF (SEX) and Tuttle Capital Thematic ETF (GANZ, Cboe BZX)
Somewhere in a new Tuttle prospectus is a fund built around data centres in space, and somebody signed off on giving it the ticker SEX. It has not started trading yet. It is one of fifteen funds in the same document, all heading for Cboe BZX and all charging 0.75%. Whatever the product committee was thinking, it has guaranteed that the fund will never be overlooked in a ticker search and will be stopped by a fair few corporate email filters on arrival.
GANZ is the fund from that prospectus that has actually reached the market. Most of its siblings pick a narrow AI or space theme and stay there. GANZ is the generalist, and its theme is whatever the adviser decides the theme should be.
The method is a proprietary “Thematic Hierarchy". The adviser identifies the most compelling macro theme, then buys the winners, then their first-order suppliers, then the second-order suppliers. The process “continues down the supply chain as long as the Adviser believes a meaningful, Theme-correlated investment opportunity exists." Individual stocks are scored using a framework called H.E.A.T., which stands for “Hedges, Edges, Asymmetry, and Themes".
The fund may buy call options for “leveraged or efficient exposure" and puts to hedge or “to express a bearish view". The prospectus states that the fund "does not use options for speculative purposes". A few pages later, the options risk section explains that “purchasing options is a speculative activity".
ProShares Ultra Nasdaq Cybersecurity (UCYB, Nasdaq)
Most leveraged funds are closed because they have lost money. This one was closed near its highs, having risen by around three quarters over the previous twelve months. Performance was not the problem; the fund had about $12 million in assets.
UCYB went in a batch of ten. The other nine were thematic funds, including the metaverse, smart materials, on-demand services, supply chain logistics and “Long Online/Short Stores". It was the only leveraged fund in the group and the only one listed on Nasdaq. The closure was announced in a filing supplement, with no press release.
The Global X PowerStock range, revisited (GOOP, AMZP, AAPP, NVDP, SPCP and TSLP, Toronto Stock Exchange)
I recently noted that Global X had listed six single-stock PowerStock funds. I’ll update this again tomorrow, when the website is supposed to go live.
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