On 6 December 2017, the Sygnia Itrix 4th Industrial Revolution Global Equity ETF ( SYG4IR) is listing on the JSE. A first to the South African landscape, the ETF tracks the Kensho New Economies Composite Index. Kensho is an American fintech company “that uses proprietary mathematical algorithms and computational models to conduct statistical analyses and to create indices”. Basically, robots. This excites us, because robots are cheap.
The New Economies Composite Index is a market index that selects companies from a subset of other Kensho indices, ranging from autonomous vehicles to clean energy, 3D printing, nanotechnology and genetic engineering. Companies with a market capitalisation of $100m and a three-month average daily traded value of $1m are included in the composite index.
The ETF offers investors access to global companies that are expected to change the way we live and work. With Fourth Industrial Revolution industries still in their infancy, this ETF is a happy star on the horizon for investors who believe in the earning potential of disruptive technology.
As it often goes with first movers, there are red flags. Firstly, gaining access to the 290 constituents of the Kensho New Economies Composite Index proved tricky indeed. While the Top 10 constituents are available on the provider’s site, getting the full picture proved much harder.
Kensho, by way of Sygnia, granted us permission to publish the list with the proviso that it’s a once-off boon. When the ETF rebalances, we might not have eyes on the full constituent list and weightings again. Kensho might want to keep a tight rein on the list to protect its intellectual property, but it leaves investors with murkiness that we’re unaccustomed to in the ETF space.
It’s interesting to note that stalwarts Apple, 3M, Avis Group, Boeing, Fiat, Microsoft, Philips Electronics, Toyota, Ford, Logitech and Dell are included alongside the specialists and newcomers in the ETF. What can we take from the fact that Kensho’s algorithms are expecting disruptive innovation from companies with longer track records?
Secondly, according to the fund profile distributed by Sygnia, the ETF might not replicate the index exactly. “The investment policy of the portfolio shall be to track the Index by buying securities that substantially make up the Index at similar weighting as they are included in the Index,” the document stated.
Sygnia’s Rian Brand says while the company expects to hold all the constituents, they want to leave wiggle room should the exact trading position be cost prohibitive. Brand says Sygnia will use “statistical tracking error minimization” where the index isn’t replicated exactly. As advisor Craig Gradidge helpfully points out, that means you hug something so tightly that you take the shape of the thing you’re hugging. The idea is to minimise the impact of the performance while keeping fees as low as possible. How and if this will be communicated to ETF owners isn’t yet clear.
The companies in the index and their technological endeavours provide great hope for the future – not just for earnings but also for how we live. Once these technologies become widely adopted, specialised ETFs like this one will very likely outperform their vanilla brethren.
For now, however, this is a hobbyists’ ETF. New technologies come with risks. The pace of change makes it easy for competitors to outperform first movers, technologies might not be adopted and companies daring enough to explore Mars might never get there. These risks are exactly what might make this ETF lucrative and exciting, but excitement is not an investment strategy.