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ETF Wrap

Jan. 29, 2021, 7:29 a.m. EST

ETF Wrap: Sons of anarchy and dividends of aristocrats

By Andrea Riquier

What just happened?

If 2020 was the doom and gloom we never thought we’d see in our lifetimes — plague, fires, violence and civil unrest — 2021 is the post-apocalyptic playground.

Unless you’ve been living under a rock, you know that this week’s market turbulence was caused by legions of bored amateur traders using retail platforms to put the squeeze on short sellers. In the first week of the new year, marauders came to Capitol Hill; now they’ve got their sights on Wall Street.

Bloomberg’s John Authers called it “ rage against the financial machine … driven by righteous anger, about generational injustice, about what they see as the corruption and unfairness of the way banks were bailed out in 2008 without having to pay legal penalties later, and about lacerating poverty and inequality.”

The question now, as with so many things, is have we gone too far in our rush to flatten the world, democratize everything, give everyone their fifteen minutes of fame?

Brexit can’t be un-referendumed, newspapers will probably never again be a voice of authority, and personal finance is now in the hands of the people. It’s a bit like the moment when Jurassic Park’s raptors figured out how to open doors.

(Here is MarketWatch’s coverage of the RobinHood traders , a story defining a short squeeze and a notable example of a squeeze involving an exchange-traded product from the summer)

Thanks for reading, as always.

‘Old-money’ funds get some new holdings

Changes are coming to the “Dividend Aristocrats” ETFs that many investors rely on for fixed income, wrote CFRA’s Todd Rosenbluth in a recent analysis.

Rosenbluth focuses on two dividend ETFs that call themselves “aristocrats”: the SPDR S&P Dividend ETF (PSE:SDY) , which tracks an index called the S&P High Yield Dividend Aristocrats Index, and the ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) , which tracks the S&P 500 Dividend Aristocrats Index.

What makes them so upper crust? SDY only holds stocks from companies that have boosted their dividends for more than 20 consecutive years — and NOBL for 25 years.

But “old money” may come with some drawbacks. The two ETFs have significantly lower exposure to the tech sector than other dividend-focused ETFs — about 2% of the two portfolios, versus about 21% for the iShares Core Dividend Growth ETF (PSE:DGRO) , Rosenbluth noted.

“We think the lack of tech exposure hurt performance in 2020, as NOBL’s 8.2% and SDY’s 2.0% total return sharply lagged the S&P 500,” he wrote.

The index provider, S&P Dow Jones, recently announced that both indexes would receive an additional tech stock before Feb. 1. But as Rosenbluth is very fond of pointing out, it pays for investors to know the specifics.

The NOBL index will pick up International Business Machines (NYS:IBM) , a company which earlier in January announced its seventh straight quarter of declining adjusted earnings and guidance, which gave analysts little hope for a long-awaited turnaround.

SDY will nab a company called Badger Meter (NYS:BMI) , a small-cap engaged in selling water meters, primarily to municipal customers.

Neither company could remotely be considered growth-y, although that’s probably to be expected from dividend-payers. And while each may technically be tech-sector, they’re by no means the FANG stocks many investors use to juice returns.

Exchange-traded sundries

  • Last week, MarketWatch wrote about investors snatching up shares of an existing ETF — the Procure Space Fund — that a new ARK Invest product is likely to mimic. As a status report, “UFO” now has $89 million in assets , more than doubling its holdings since ARK’s announcement. One individual stock likely to benefit, Virgin Galactic Holdings, is up 68% since that time.

  • JOYY — and no pain? The Infusive Compounding Global Equities ETF just topped $500 million in assets, with a pitch that seems tailor made for these dark days: the fund “targets goods and services that consumers seek out to find bits of joy or happiness. Examples include Amazon (NAS:AMZN) (time-saving convenience) Netflix (NAS:NFLX) and Disney (NYS:DIS) (entertainment), Nike (NYS:NKE) (health) and more. In the last 12 months, JOYY is up 30%, about double the return on the S&P 500.

Is there an ETF for that?

Well… yes and no.

The past year or so has seen a crush of products coming to market that promise to offer downside protection and upside amplification . Now comes another option – but not in ETF form.

The Hercules Fund, launching this week , uses options, like puts and calls, as well as a few other things, including volatility-linked ETFs, with its aim to deliver that protection/amplification combo. It also diversifies from more traditional asset classes like stocks and bonds. It will use a mutual fund wrapper, with a unique twist: a “2 and 20” fee structure like hedge funds: 2% is a management fee; 20% is a performance fee.

Hercules is a Los Angeles-based firm founded by semi-pro football player James McDonald. The new fund’s strategy is something the firm employs successfully for existing clients: Hercules says it returned 34% from March 1 to Sept. 30 of last year, more than double the 15% increase in the S&P 500 in that time.

McDonald is candid when asked why he’s chosen this unusual vehicle. “We offer high skill compared to a mutual fund and liquidity and accessibility compared to a hedge fund,” he told MarketWatch. (Hercules won an industry award for the strategy) “No ETFs have ever taken this approach with a two-and-twenty fee structure.”

And why is that fee structure important? “Because my goal is to buy an NFL team.”

McDonald is very serious about his goal, but as marketing material for the fund argues, “This incentivizes Hercules Investments to deliver value for the mutual fund’s shareholders. Most mutual funds simply charge an annual management fee and aim to outperform a benchmark.”

Perhaps more intriguing, however, is the question of which NFL team McDonald can aim to buy. Is there a betting pool for that?

Read next: 3 ETFs for the reopening trade

Visual of the week

Source: Jim Reid, Deutsche Bank, who adds: “The question I have is whether this is a fascinating curiosity or whether it’s indicative of a larger problem for global markets in 2021.”

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