New York-headquartered Esoterica Capital, a newly formed asset manager specializing in thematic investments, has introduced its first ETF.
The fund is the first ETF in the US to provide actively managed exposure to the fast-growing 5G theme.
The Esoterica NextG Economy ETF (WUGI US) has listed on Cboe BZX Exchange and provides actively managed exposure to a global portfolio of companies directly linked to the theme of 5G technology.
5G (industry short form for ‘fifth generation’) refers to the latest generation of cellular mobile communications and the innovation and infrastructure that supports the technology.
Its adoption should provide faster speeds, more functionality, and lower latency, helping to transform work practices and daily life.
Widespread 5G connectivity has the potential to make information universally accessible, foster a digitalized sharing economy, transform diverse industries, and enhance people’s quality of life.
In targeting the 5G theme, the ETF invests in firms along three distinct categories: infrastructure, edge devices (mobile phones), and services.
Infrastructure companies include those improving and advancing the development of 5G infrastructure including core, transmission, and radio access networks, and cloud computing.
Companies involved with edge devices include those bringing 5G to the end-user through the manufacture of devices, such as cellular phones, and their components.
The final category covers a broad range of companies whose products and services will be greatly enhanced by the adoption of 5G technology. Relevant products and services may include video streaming, online gaming, autonomous driving, augmented and virtual reality, internet of things, and even remote surgery.
The portfolio is expected to be high-conviction, holding between 35 and 45 stocks. Constituents will be drawn from both developed and emerging markets, and the fund is expected to focus predominantly on opportunities within the US and Asia (notably, China and Taiwan).
When selecting firms, Esoterica combines both top-down (thematic research examining broad market trends and changes in the underlying technological cycle) with bottom-up (fundamental and quantitative) analysis.
Esoterica notes that the inclusion of bottom-up analysis aids the fund in adapting to any market environment. For example, companies with quality characteristics – strong ability to generate free cash flow, robust balance sheets, and low leverage – have fared better than others during the recent market pullback caused by the coronavirus outbreak.
Esoterica has priced its ETF with an expense ratio of 0.75% which is somewhat higher than the two existing US-listed ETFs that already target the 5G theme, though these are both passive index-linked funds. The $300 million First Trust Indxx NextG ETF (NXTG US) tracks the Indxx 5G & NextG Thematic Index and comes with an expense ratio of 0.70%, while the $230m Defiance Next Gen Connectivity ETF (FIVG US) tracks the Bluestar 5G Communications Index and costs 0.30%.
Esoterica’s higher price tag reflects the increased costs that are generally synonymous with an active management approach, which, the firm argues, is better able to capture the opportunities within an investment theme.
Bruce Liu, Co-Founder and CEO of Esoterica Capital, explains, “In a broader sense, passive management could capture the plain-vanilla market risk premium (ETFs such as SPY and EEM); a systematic approach could capture the factor risk premium (smart beta ETFs); while we believe it takes fundamental research and active management to capture the theme risk premium (5G, technology innovation, etc).
“In terms of 5G, the value creation comes in phases. Semiconductors might benefit more in the early stage of the infrastructure build-out, edge cloud and modern database platforms might capture the next wave, and eventually enabling technologies that are built on top of 5G connectivity potentially become big winners (think Instagram and Netflix in 4G cycle). It takes active management to adjust the portfolio along with the development of the 5G cycle.”