- From semiconductor ETFs to defense funds, plenty of names stand out
- We outline the options, as well as the risks to look out for
“Just buy a tracker” is a common refrain in investing, and those following this mantra have often done well to keep things simple. That typically means backing established, widely followed markets such as the S&P 500, investing regularly and resisting the temptation to tinker too much with a portfolio.
The latest Investors' Chronicle Top 50 ETFs list, published this week, caters to such a mentality. Its main focus is on what we dub "core" holdings, those such as MSCI World and FTSE 100 trackers that cover the best-known stock markets. The list is predominantly focused on these more vanilla funds rather than anything especially esoteric.
Having said that, the exchange traded fund (ETF) space is still home to plenty of niche and exotic funds, and the expert panel who reviewed our list this year were keen to highlight some options on this front. While not downplaying the risks involved, it is worth outlining a few topical names turning heads.
Arms race
With countries such as the US dedicating large sums to supporting Ukraine in its war with Russia, and geopolitical tensions more broadly showing no sign of abating, defence has risen up the agenda as an investment theme. Increased spending has already fed into some company results, with businesses such as BAE Systems (BA.) reaping the rewards.
One of this year's panellists, Charles Stanley's Lynn Hutchinson, has made the case for ETFs as a play on this theme, with Han ETF's Future of Defence ETF (NATO) standing out.
The fund targets companies that generate revenue from Nato and Nato ally spending on defence, with its literature highlighting the fact that European Nato members need to spend more to reach the '2 per cent of GDP' target outlined by the alliance. They also need modernised defence systems to counter a rise in data breaches and cyber attacks.
This defence remit spans both the physical and digital realm, with the fund's top holdings including Check Point Software (US:CHKP), BAE Systems, Palo Alto Networks (US:PANW) and Rheinmetall (DE:RHM).
But thematic ETFs come with a multitude of problems that we have highlighted in the past, from higher fees to performance chasing, and these are worth bearing in mind when weighing up the likes of this ETF or its rivals.
There are other issues. Sometimes only a handful of companies fit into a nascent investment theme, meaning that funds can end up being pretty concentrated and carry a fair amount of stock-specific risk.
Conversely, others can hold companies that seem only tangentially related to a theme or arguably sit in a portfolio to provide liquidity, as with the presence of Netflix (US:NFLX) in a space exploration and innovation ETF launched by Ark in 2021.
The Future of Defence ETF is not especially concentrated, with 59 holdings in the fund and its top 10 positions making up a reasonably restrained 46 per cent of the portfolio. The largest four positions sit at around the 5 per cent mark, meaning stock-specific risk is relatively limited.
That’s a notable contrast to the VanEck Defence ETF (DFNG), which targets "defence technology companies, large-scale cyber security firms and defence-relevant service providers".
This portfolio looks pretty punchy by contrast, with just 28 holdings and the top 10 alone making up more than 60 per cent of the portfolio. Top three positions Leidos (US:LDOS), Thales (FR:HO) and Safran (FR:SAF) each sit on positions of more than 8 per cent.
Leidos alone is up by almost 40 per cent for 2024 so far, and these stock-specific wins might explain why the VanEck fund is slightly ahead of the Future of Defence ETF so far this year, with the former up by 23.4 per cent and the latter on 18.2 per cent.
Investors should remember that these punchy positions can also hurt on the way down. On the plus side, a concentrated portfolio might be simpler for investors to analyse by virtue of having fewer names to monitor.
Notes on a theme
There are other topical products. Take the iShares Electric Vehicles & Driving Technology ETF (GCAR), which has 88 holdings and which ETF panellist Goncalo Machado likes both for its topical nature and the fact it is "diversified beyond Tesla".
Tesla is nonetheless the fund's most prominent holding on a 6.3 per cent weighting, but names such as Delta Electronics (TW:2308), Advanced Micro Devices (US:AMD) and Renesas Electronics (JP:6723) are not far behind it.
Beyond this offering, Machado points to the presence of funds that track the bitcoin price, such as the WisdomTree Physical Bitcoin ETP (WXBT). Elsewhere, investors can take exposure to other fashionable sectors, with one example being the iShares MSCI Global Semiconductors ETF (SEMI).
As you would expect, this fund serves as a very targeted play on some of the most prominent semiconductor companies, with a 9 per cent weighting to Nvidia (US:NVDA), 8.3 per cent in Broadcom (US:AVGO), 8.1 per cent in Taiwan Semiconductor Manufacturing (TW:2330) and 7.9 per cent in ASML (NL:ASML).
Unsurprisingly it has performed incredibly well this year, making a sterling total return of around 30 per cent in the first half of 2024. It also made around 60 per cent in 2023 but lost almost 30 per cent in the growth sell-off of 2022.
These figures also illustrate one other issue with many thematic funds: that they can be highly correlated to the likes of US tech.
A different position, as highlighted by Nutmeg’s Pacome Breton, is the Global X Uranium ETF (URNG). He notes that uranium is “benefitting from high interest due to its usage in the renewable [energy] transition”.
The fund focuses on companies involved in uranium mining and the production of nuclear components, and has some extremely punchy position sizes. Cameco (CA:CCO) makes up almost 16 per cent of the portfolio, with NexGen Energy (CA:NXE) on around 8 per cent. The fund posted a huge return of nearly 40 per cent in 2023.
Slow and steady?
There's plenty of reason to be wary of the names above. They can be pretty volatile, some believe they end up buying into a sector just as the hype, and the price, reaches its peak, and there are other causes of instability. For one, some funds will fail to get enough traction and get closed or merged away.
Not all specialist funds highlighted by our panel are quite so high-octane, however. Dzmitry Lipski, Interactive Investor's head of funds research, points to the VanEck Morningstar Global Wide Moat ETF (GOGB), which targets companies with competitive advantages based on Warren Buffett's concept of economic moats. That results in a roughly equally weighted portfolio of companies, ranging from TSMC to Imperial Brands (IMB).
The fund has a spread of sector exposures with a quarter in industrials, 18.7 per cent in financials, 17.1 per cent in consumer staples and 13.4 per cent in healthcare. Around half the portfolio is in the US.
With its focus on quality metrics, this strategy might be expected to prove more defensive than a global tracker, but also to lag behind when markets rally hard. Recent performance bears that out: it made just a modest loss in the fierce growth sell-off of 2022 but has only posted slight gains over the past 18 months. Investors might therefore see this as something of a diversifier in relation to classic growth investments.
