Proponents of thematic investing have reason to cheer with the arrival of a new ETF issuer, Rize ETF, dedicated to thematic portfolios.
Thematic specialist Rize ETF has debuted with a pair of cannabis and cybersecurity ETFs.
The London-based firm is founded by four alumni of ETF Securities who were subsequently together at LGIM and aims to carve out a niche as a specialist provider of thematic ETFs.
It sees itself as appealing to a new generation of investors that have global perspectives and a less siloed approach to investing.
Rahul Bhushan, one of the firm’s co-founders and its investment strategies lead, said, “There is a growing belief among younger investors that the traditional asset management sector is out of touch and behind the curve. We want to democratize access to emerging and disruptive themes, giving modern-day investors early exposure to the global developments that are most relatable and meaningful for them.”
The firm has debuted with a pair of equity ETFs focused on cybersecurity and data privacy, and medical cannabis and life sciences. The funds have been designed in collaboration with index operator Foxberry and specialist research providers Tematica Research and New Frontier Data.
Stuart Forbes, another of the firm’s co-founders and its product lead, said, “The only way that you can legitimately capture the companies best exposed to an emerging theme for which traditional sector classifications are not available is to partner with thematic research houses that have a unique ability to distill a theme into investable sub-classifications in order to identify the companies that are best exposed to the structural tailwinds of a theme using a bottom-up approach.”
The funds have listed on the LSE in USD and GBP, and on Xetra in EUR with listings on Borsa Italiana pending.
Cybersecurity
The Rize Cybersecurity and Data Privacy UCITS ETF (CYBR LN, CYBP LN, RCRS GY) tracks the Foxberry Tematica Research Cybersecurity & Data Privacy Index which selects its constituents from a universe of developed and emerging market stocks with market capitalizations greater than $100 million.
Using insights from Tematica Research, the methodology identifies those firms that have a minimum 50% revenue exposure to the cybersecurity theme.
The index also incorporates ESG considerations within its construction, a move that differentiates it from existing cybersecurity indices. Specifically, the index removes companies engaged in the aerospace and defence sector thereby excluding firms such as BAE Systems, General Dynamics, and Thales which are involved with controversial weapons.
The remaining constituents are assigned to one of two company classification groups – Product Providers and Service Providers.
Product Providers offer hardware or software that is installed locally and the majority of computing processing power is provided by the end-customer. An example of a company in this space would be one whose product is downloaded and installed by the customer on their computer or network.
Service Providers offer hardware or software that is accessed remotely and the majority of the computing processing power is provided by the service provider. An example of a company in this space would be one whose services involve the customer routing web traffic through the service provider’s servers through which the service provider performs real-time analysis and issue resolution.
The weight of each company classification group within the index reflects the relative total market capitalization of the constituents within each group. Within each group, however, company weights are set to favour those firms with a higher percentage revenue exposure to the cybersecurity theme as well as those with greater stock liquidity.
The index is reconstituted and rebalanced on a semi-annual basis. It currently consists of 45 stocks and is primarily exposed to the US (71.4%) followed by Israeli (9.7%), Japanese (8.4%), and UK (6.3%) markets.
Bhushan commented, “Cybersecurity has always been an exciting area for us since we launched Europe’s first cybersecurity ETF back in 2015. The market is entering into a new phase of growth as technologies such as AI and the cloud rapidly change security practices and digital infrastructures around the world and as the sector is buoyed by favourable regulation such as GDPR in Europe and CCPA in the United States.
The fund comes with an expense ratio of 0.45% which is notably cheaper than the $1.2 billion L&G Cyber Security UCITS ETF (USPY LN), the oldest and most established cybersecurity ETF in Europe, which costs 0.75%. However, it is slightly more expensive than the $420m iShares Digital Security UCITS ETF (LOCK LN) which comes with an expense ratio of 0.40%. This fund, which launched in September 2018, is linked to the Stoxx Global Digital Security Index.
Medical cannabis
The Rize Medical Cannabis and Life Sciences UCITS ETF (FLWR LN, FLWG LN, BLUM GY) replicates the Foxberry Medical Cannabis & Life Sciences Index which selects its constituents from a universe of global firms with market capitalizations above $30m that are listed on eligible exchanges in the US, Canada, or Hong Kong. Compared to rival medical cannabis ETFs, the underlying index captures companies not only in the US and Canada, but also those operating in Australia, Israel, China, Colombia, Switzerland, and the UK.
The methodology utilizes insights from New Frontier Data to select firms with exposure to the medical cannabis industry and classifies them according to one of four sectors: biotechnology/pharma, agriculture tech, hemp & CBD, and big pharma.
Companies are excluded if they are non-compliant with state and federal laws in the countries in which they operate or if they are directly involved in the production or distribution of cannabis for the recreational consumer market.
The weight of the big pharma sector in the index is set at 10% and constituents within this sector are equally weighted. The remaining weight (90%) is distributed amongst the constituents from the other three sectors according to average daily trading volume while capping individual stock weights at 15%.
The index currently consists of 23 companies and is primarily exposed to stocks from the US with a weight of 71.4%, followed by the UK (16.2%), Israel (4.2%), and Australia (3.4%). The exposure to the four primary sectors are biotechnology/pharma (58.2%), agriculture tech (15.9%), hemp & CBD (14.8%), and big pharma (10.8%).
There is considerable stock-specific risk within the portfolio, with the largest four constituents accounting for three-fifths of the fund. These are GW Pharmaceuticals (16.2%), ScottsMiracle-Gro (15.9%), Arena Pharmaceuticals (15.6%), and Cara Therapeutics (14.3%).
Bhushan added, “In our view, we’ve only just scratched the surface of the medical potential of cannabinoids such as THC and CBD and expect to hear much more about new cannabinoids such as CBN, CBC and CBG over the course of 2020. On a macro level, over 2020 and beyond, we anticipate a continued trend towards liberalization, legalization, and globalization of medical cannabis as a therapy.”
The fund has an expense ratio of 0.65% and comes just one month after the Medical Cannabis and Wellness UCITS ETF (CBSX GR) launched on Deutsche Börse and LSE. This ETF, Europe’s first cannabis-related ETF, was launched through a partnership of Toronto-headquartered Purpose Investments and London-based white-label ETF provider HANetf. It tracks the Medical Cannabis and Wellness Equity Index and has an expense ratio of 0.80%.