Thematic funds offer the hope of catching a trend and seeing huge gains. However, choosing the right topic at the right time is difficult.
“Almost all the money comes in this late,” said Craig Basinger, chief market strategist at Purpose Investments in Toronto. “We see this over and over again.”
Even if investors get involved in a topic before it reaches a peak, many of them hold on too long, Basinger said, believing in a long-term trend like electric vehicles without understanding how changing market dynamics affect their holdings. fund.
Purpose launched a fund last week that tries to impose discipline on topic selection. The Purpose Tactical Thematic Fund (Cboe Canada: RTT) starts with a set of 16 thematic ETFs and determines which ones are worth holding based on momentum.
“I think we’ve found a way to bring the investment process to a part of the market where it’s missing,” Basinger said.
Thematic funds are highly volatile. Target Report showed that among the 50 largest U.S.-listed thematic ETFs, the annual price change as of October 13 ranges from 47% to -32%. Many funds that do well one year see a turnaround the next.
The new fund’s approach is similar to the $689 million Purpose Tactical Asset Allocation fund (Cboe Canada: RTA), although its scope is narrower.
The process of creating a new thematic fund begins when managers record positive dynamics in one of the 16 base ETFs and 20% of the positions in this ETF are added to the fund. Once a fund is invested in five ETFs, it is full and does not add positions, even if other ETFs in the universe show momentum. Basinger said Purpose chose the border because it wanted to maintain “significant positions.”
When one of these five positions reaches negative momentum – whether due to a legislative change, a change in overall risk appetite, or some other reason – the Cel Fund sells its entire 20% position. If there is no replacement ETF in the world with positive momentum, this 20% position is split 50/50 between cash and the S&P 500 ETF.
At launch, Purpose had just two underlying thematic ETFs – one focused on cybersecurity and the other on gold – and 60% of the fund was split between cash and the S&P 500.
Basinger said the position may seem unusual, but it reflects the current environment as well as the nature of the fund. Because most thematic funds are speculative in nature, there are times – such as in a broader economic downturn – when the Target Fund cannot be invested in any of the underlying 16 ETFs, he said.
To diverge slightly from typical technology themes such as artificial intelligence, clean energy, biotechnology, e-gaming and autonomous vehicles, Purpose has included themes such as strategic minerals, infrastructure and gold in its 16 ETFs.
All of these underlying ETFs are US-based. Basinger said that because the fund expects average trades of a month or more, it makes sense to use cheaper and more liquid U.S. ETFs.
The medium risk rated fund belongs to a series of ETFs and mutual funds. The management fee for ETF and Series F is 0.50%, while the fee for Series A is 1.50%.
A different type of asset allocation
Purpose has also launched new asset allocation funds that aim to address some of the pitfalls in 60/40 portfolios that came to light during last year’s market crash.
These three funds come in the standard Conservative, Balanced and Growth package, but have more room to maneuver by adjusting allocations based on momentum and fundamentals. They can also invest in alternative funds and use hedging and short-selling strategies.
Earlier this month, Horizons introduced leveraged asset allocation funds with call options.
“Purpose believes that the forward-looking investment climate presents a very different set of challenges than the post-2008 bull market, which typically leaves investors prone to staleness,” the company said in a statement.
The new funds are actively managed and include both active and passive, external and own funds (up to a maximum of 40% of investments in special purpose funds, excluding cash funds).
The Target Active Growth Fund (TSX: PAGF) has a base allocation of 81% equities, 17% fixed income and 2% cash, but according to the prospectus, equity exposure can range from 66% to as high as 96%. .
The Purpose Active Balanced Fund (TSX: PABF) has a base allocation of 60/38/2, but equity exposure can range from 45% to 75%. The Purpose Active Conservative Fund (TSX: PACF) has an underlying value of 39/59/2, with equity exposure ranging from 29% to 49%.
At launch, the equity exposures of all three funds were at the lower end of their respective ranges.
The management fee for ETFs and investment funds series F is 0.20% and for series A 1.20%.
BMO seeks to structure results
BMO Global Asset Management launched seven new ETFs this month, including three structured performance products that aim to deliver specific returns over a specific period of time.
The BMO Canadian Banks Accelerator ETF (Cboe Canada: ZEBA) and the BMO US Equity Accelerator Hedged to CAD ETF (Cboe Canada: ZUEA) aim to enhance returns in slow growth environments.
Both ETF accelerators use options contracts to deliver approximately twice the price return of their underlying indexes over the three-month performance period. As a trade-off, funds can benefit from the maximum increase in value that investors can experience over a given period – starting at 6.6% for ZEBA and 7.0% for ZUEA. The first billing period ends on December 31 and then resets quarterly.
BMO US Equity Buffer Hedged to CAD ETF – October (Cboe Canada: ZOCT) uses options contracts to provide exposure to the S&P 500 Index with a cap of 10.5% while protecting against losses of up to 15%.
The fund – which has an accounting period of one year ending on September 30, 2024 – is aimed at investors concerned about big declines in stocks and less concerned about benefiting from big gains. For example, if the index falls 20% during the earnings period, the buffer will absorb most of the decline and the ETF will fall 5%. If it gains 15%, investors’ profits will be limited to 10.5%.
Earlier this year, FT Portfolios Canada Co. has released a buffer ETF that invests in a basket of underlying target-performing ETFs.
BMO’s three structured performance funds have management fees of 0.65% and risk ratings are average.
Here is a list of other new BMO ETFs:
- BMO Long Short Canadian Equity ETF (TSX: ZLSC)
- BMO Long Short US ETF (TSX: ZLSU)
- BMO S&P/TSX 60 Index ETF (TSX: ZIU)
- BMO USD Cash Management ETF (TSX: ZUCM and TSX: ZUCM.U)
New segment funds
Empire Life has launched two new active growth-focused segregated funds. Empire Life Global Growth GIF is managed by Empire Life Investments Inc. and the Empire Life Canoe Global Equity GIF underlying fund is managed by Canoe Financial.
Meanwhile, Canada Life is adding balanced portfolios and real assets to its dedicated fund shelf. This week, the company announced that it is making the five underlying funds in its Canada Life Sustainable Portfolios available as stand-alone segregated funds and mutual funds.
It also adds Canada Life Diversified Real Assets Fund and Canada Life Global Small-Mid Cap Growth Fund to its segment fund offering. The Real Estate Asset Fund was launched as an investment trust earlier this year.
