I’ve written critically of well-established mega-ETFs that are all in on FANMAG — Facebook (FB), Amazon (AMZN), Netflix (NFLX), Microsoft (MSFT), Apple (AAPL) and Google (GOOGL) — and similar kinds of popular stocks, not necessarily because I have anything against the stocks, all of which I have exposure to via ETFs I own, but because the love is overblown and more a function of mathematical inertia (market cap weighting that exaggerates the impact of strong stock performance plus) than human judgment. Here’s another concern: FANMAG is about the present. Do we really know — REALLY! — that these companies will be similarly admired five, 10, or 20 years from now? Growth oriented and young individuals and advisers with such clients may want to give thought to positioning portfolios for the tomorrow’s FANMAG, something that can be done with thematic ETFs.
Are You up On The Latest?
While FANMAG is hardly 2020s answer the to the rustbelt of the 1980s, it’s not exactly Shangri-La either. Consider:
- Google’s advertising business is getting slammed. Yes, the coronavirus economic shock is a factor. But even beyond this, we have to remember, as I wrote years ago when I covered broadcasting stocks at Value Line, “just because it doesn’t have a smokestack doesn’t mean it isn’t cyclical.” (Which specific report? I don’t remembers.) As hip as Google may be, its also cyclical.
- The 6/30/20 cover story in The Economist is a must read for anybody who cares about Amazon. No, the sky is not falling and actually its still pretty high up there. But Jeff Bezos and his management team are finding it quite a challenge to keep it aloft, given how much tied the company’s fortunes are to cloud services, as opposed to the e-retailing for which it is most famous.
- Tom Brady chose to bolt from the New England Patriots but eSports superstar Ninja has no choice about becoming a free agent: Mixer, the Microsoft-owned streaming platform that lured him from Amazon-owned Twitch is being shuttered as Microsoft decides to hitch its streaming wagon to Facebook’s horse.
- Has anybody noticed how many original programs Netflix is bankrolling — and cancelling — and how competition keeps on growing? And, of course, we have Apple’s ongoing scramble to deal with the fact that new iPhone models aren’t quite what they once were. Just sayin’ . . . .
No, we’re not looking down to the bottom of a cliff. The companies are fine. In fact, some are benefitting from problems challenges being experienced by others. Advertising is still growing at FB and AMZN. Among Ninja’s potential new platform choices are his old home at AMZN’s Twitch and GOOGL’s You-Tube streaming platform. NFLX’s rivals include AMZN and AAPL and Disney (DIS), not quite a FANMAG, but close to it. And no, I’m not selling any of my ETFs that own these stocks.
It’s just that these companies fall short of perfection. There are questions that need to be addressed.
Actually, that’s normal. Nothing is perfect and every business has questions that need to be addressed. But when companies are so extremely admired and extremely weighted in what are supposed to be passive index funds, it seems awfully hard to argue that these should be the primary engines of any portfolio that’s positioned for long-term growth.
Tuning In To The Future
I don’t know what the FANMAG of 2040 will look like. I don’t even know what acronym will be used. SVRW? Oops . . . they’ll need to find at least one company whose name begins with a vowel. SVROW? Still doesn’t roll off the tongue. VROW , , , as long as we can find popular companies for each letter. Who said it was easy to start a fad?
The good news is that it’s a heck of a lot easier to tune into the kinds of businesses those companies are likely to be in. This is not a matter of quant. It’s about vision. Not everybody has it, but many do possess the foresight it takes and speaking for myself, I’m not too proud to ride the coattails of those who give clear explanations. And no, this isn’t just talk. The vision that ultimately paved the way to FANMAG was already in place when I got into security analysis back in 1980. (I wish I had enough sense back then to invest in companies written about by the late Lucien Virgile in the “Technologies of the Eighties” series he wrote regularly for Value Line’s Selection & Opinion publication. In fact, I even remember a business school seminar from 1979 that discussed unheard of innovations that are now seen as quaint.
It isn’t as if this was yes/no phenomenon: Buy these companies in 1980 or be a loser. This sort of thing is an evolution. The strategy back then would have been to buy those companies in 1980s, sell some and buy others as developments warranted and continue along until one eventually winds up at FANMAG, not in 2020 but earlier enough to have profited from the run up to where it is now. The names weren’t known or admired in 1980. But the themes were known and portfolios built on the basis of the themes would have gotten long-term investors to the places where they wanted to go — even despite the bitter reminder many of the more aggressive souls got in circa 2000 about the existence of risk and the need for legitimate ongoing analysis.
Identifying Today’s Themes And Investment Vehicles
Here’s the hack for tuning into future-oriented ETFs: Search for those classified as Global.
Yes, this is what has to be done even if you, like me, have a home country bias. Many, and in some cases, almost all, of the companies in which these ETFs invest are U.S. companies. But they aren’t so through (prospectus) mandate. These ETFs are authorized to invest anywhere in the world and those that have domestic portfolios have them only because that’s where today’s investable plays just so happen to be based Next year, though, it may be different and more may be outside the U.S.
I’m not suggesting anyone invest outside the U.S. because doing so is better than sticking to U.S. only. This isn’t about diversifying globally because a passive guru says you’re deluded if you try to think that it’s better to be in some places and not others. I’m geographically agnostic (subject to one exception to be noted below). When it comes to forward themes, I’m suggesting that one invest in companies (doing so via ETF is easier) and let the geographic exposure fall where the companies take the portfolios.
This takes a bit of legwork. A lot of ETFs classified as Global have nothing to do with the sort of thematic investing being discussed here and are instead, plays on the economy, the market, etc. of a specific country or region. So expect to wind up with a big list and the need to do some browsing. To help you along, I searched on PortfolioWise for Global Equity ETFs, downloaded them, and manually curated the list to wind up with a reasonable but admittedly imprecise collection 97 thematic ETFs. You can get the file here. (It’s in Excel; if you upload it to create a screenable list, your platform may require that you first save it as a csv file, as does PortfolioWise.)
Relax; I’m not giving you 97 unique themes that need to be addressed. Most themes have multiple ETF offerings. ETFs tend to be named very descriptively so it’s easy to scan down the list and quickly identify those that may be of interest to you.
Here’s my admittedly imprecise eyeball-created summary of the kinds of themes you can find here, and the top rated ETF in that area based on the PortfolioWise Power Rank (and where there are multiple ETFs sharing the same rating, I choose the higher score pursuant to the more granular Group Rank.).
- Replacing Humans: Andrew Yang is right. The robots are coming for our jobs. I’ll leave the political ramifications to Mr. Yang and others in field. As investors, though, we can try to at least profit from the trend via ETFs that focus on such areas as robotics and artificial intelligence. Top rated ETF: Robo Global Robotics and Automation (ROBO) (ETF Home)
- Agricultural Innovation: Geopolitics aside, the world’s population is growing and we’ll need to keep increasing agricultural productivity to keep feeding people. We did it in the past, which is why we’ve thus far avoided the dire Malthusian forecast of mass starvation, but we’ll need to keep getting better. These ETFs invest in companies that work to do that. Top rated ETF: Vaneck Vectors Agribusiness (MOO) (ETF Home)
- Batteries: Yeah, that’s what you cite as the cause when you don’t want to admit you’ve been ghosting somebody (“My phone died”). It’s also crucial for lots of other portions of the world that’s emerging. Right now, there’s only one excuse-killer ETF for this, but we rank it Very Bullish: Global X Lithium & Battery Tech (LIT) (ETF Home)
- The Cloud: Is there anyone who doesn’t know what this is and why it’s important? We all use it. But business needs more and more and more and these ETFs invest in companies that help make it happen. Top rated ETF: Global X Cloud Computing (CLOU) (ETF Home)
- E-commerce: This is another of the world’s worst-kept secrets. Amazon is not alone. Top rated ETF: Amplify Online Retail (IBUY) (ETF Home)
- Fintech: So you bank and trade stocks online. No, that’s not the end game, not by any means. We’re just getting warmed up here and these ETFs invest in companies pushing us that way. Top rated ETF: ARK Fintech Innovation (ARKF) (ETF Home)
- Infrastructure: Surely you know how badly this needs to be addressed; whether to repair what’s aged and crumbling in the US, to build what isn’t but needs to exist in other parts of the world (especially the emerging world), and to give you a chance to do what you shouldn’t do with your phone while in your car as you sit moving at zero mph due to a traffic jam caused by construction crews. (I’m all about safety; when the traffic is ready to move, put the @#^$# thing down!) Money for infrastructure hasn’t come as quickly as the need, so the top ETF is only ranked Neutral as distinct from Bullish for Very Bullish for the others I mention today, but pickup is inevitable. Top rated ETF: FlexShares Stoxx Global Broad Infrastructure Index (NFRA) (ETF Home)
- Israel: Did you know that Israel is a hub for innovative technology companies? Catch up, or let one of these ETFs keep pace for you, Top rated ETF: Bluestar Israel Technology (ITEQ) (ETF Home)
- Autonomous Vehicles: We’ve heard all about them and about how companies like Alphabet (GOOGL) and Uber (UBER) manage to hog the headlines. But that’s not necessarily where, in the corporate world, it’s going to happen. There are, however, ETFs that find companies likely to accomplish that, and even make human operated vehicles keep getting better. Top rated ETF: KraneShares Electric Vehicles and Future Mobility (KARS) (ETF Home)
- Security: Worried about hackers? Who isn’t. And as the world becomes more automated, the challenge will become more acute. These ETFs invest in companies that make armaments, to speak, for cyber peacekeepers. Top rated ETF: ETFMG Prime Cyber Security (HACK) (ETF Home)
- Water: Did you think that the energy-efficiency moves that make the world less dependent on oil solved our natural resource problems? Think again. In some parts of the world, water is ridiculously plentiful (with occasional hurricanes to jog our memories lest we become too forgetful). But in many parts of our planet, water is way too scarce, especially water that is filtered and usable. These ETFs invest in companies that address that. Top rated ETF: Invesco Global Water (PIO) (ETF Home)
- Outer Space: Were you fascinated by the successful launch by Space X of its manned rocket? Are you into the new Netflix series Space Force? There’s only one ETF that invests in companies that push us beyond the earth’s realm. I warn you its rated Bearish at the moment, so you may want to just watch for now, as with the Space X launch and the Netflix show. At least you can do your homework so you’re ready to strap in when it becomes go time. It’s Procure Space ETF (UFO) (ETF Home)
- ESG: We increasingly want corporations to be good citizens in general, not just profit-spinning machines, and ESG refers to various rating protocols that grade corporations on how well they do. As to investment implications, I have not yet formed an opinion on all this. But those that have and approve may want to consider ETFs that focus on companies that score well in this regard. Top rated ETF: FlexShares Stoxx Global ESG Impact(ESGG) (ETF Home)
- Environmental: This is a first cousin to ESG. But instead of focusing on companies with low carbon footprints, these ETFs invest in companies that help others achieve better results in this area. Top rated ETF: Vaneck Vectors Low Carbon Energy (SMOG) (ETF Home)
- Demographics-Lifestyles: This is a broad group that invests in companies that cater to the way we live, wether its the desire to live longer, to live healthier and to do things in new ways for a new generation. Because this category is so broad, I’ll offer several Bullish or Very Bullish ranked ETFs: ETFMG Video Game Tech (GAMR) (ETF Home); Sofi Gig Economy (GIGE) (ETF Home); ProShares Pet Care (PAWZ) (ETF Home); and Global X Health & Wellness (BFIT) (ETF Home).
- General Innovation: The foregoing categorization was done by eye and is necessarily imprecise. This is a fact of life in the world of ETFs, where change is constant and very challenging for classification. So we have to always be prepared to notice some general catchalls. Top rated general innovation-oriented ETF: ALPS Disruptive Technologies (DTEC) (ETF Home)
Don’t think of any of these ETFs, or even an ETF basket you might create from this list or from similar ETFs, as the centerpiece of a portfolio. Consider the core-satellite approach, in which the core consists of one or a small collection of “regular” ETFs (however you define regular — and you can still try to pick the best you can from whatever categories you consider) with thematic ETFs included as smaller-position-size satellite holdings. As any or all of these themes and companies mature, migrate them toward the core and look for new themes/satellites that come to light in the future.
Bear in mind that some of these ETFs are likely to have micro levels of assets under management and/or macro-sized expense ratios. Specialty product can’t be expected to look like something you’d grab off a shelf at Walmart. Small size is OK for equities (if an ETF liquidates, the proceeds will wind up immediately in your brokerage account labeled by your firm as a proceeds from a sale). Diseconomies of scale, coupled with extra expertise, will add to expense ratios. That’s OK if performance net of fees works.
Holding disclosure … Long ARKF, PAWZ