Analysis

Why tech-themed ETFs are so popular with smaller providers

David Tuckwell

a man in a suit

Tech-themed ETFs have proved very popular with smaller ETF providers. Joining this swelling crowd is SabreTooth Advisors, who, in partnership with AdvisorShares, listed the AdvisorShares Sabretooth ETF (BKCH) last week.

Like other niche offerings, BKCH focusses on innovative tech. But how does BKCH stand out in this crowded market? And why is this niche so popular with smaller providers in the first place? We spoke with Scott Freeze, the CIO of SabreTooth Advisors, to find out more.

We've seen a lot of tech-themed ETFs enter the market in the past two years. Why did you choose this particular niche?

That's a great question! While the markets have seen a plethora of thematic and tech focused launches over the past few years, we feel that BKCH is unique in that it combines two forward-looking sub-sectors of technology with Cloud and Blockchain. Let's look at each sub-sector separately and start with Blockchain. First, we do not invest in cryptocurrencies or companies that simply put "blockchain" in their name that aren't actually seeing significant bottom line impact from blockchain. We do not view blockchain technology as a revenue generator, rather we see it as a means to reduce costs and increase security for companies. So while there are a myriad of uses for the technology, our focus is primarily on the financial and fintech side of blockchain applications - such as payment processing, the speeding up and simplifying of both national and global cross-border payments, share trading on exchanges, security and smart contracts. We focus on the few best of breed companies within those spaces that have significant size and transactions to see bottom-line impact from the use of the technology.

The cloud space is even more dynamic in that not only do you have the market leading "Cloud Kings" and upcoming "Cloud Princes" but the suppliers to both. We see cloud as the fastest growing sub-sector of technology and a continued upward path for cloud services. It's important for investors to be mindful of all the applications and variances within the cloud space. Cloud encompasses servers, storage, databases, networking, software applications, analytics, creating new apps, testing and building applications, streaming audio and video, AI, etc. Cloud is broken down from a business standpoint; to infrastructure as a service; platform as a service; serverless computing; and software as a service - and combine public clouds, private clouds and hybrid clouds. Without spending 500 pages explaining all the implications of each point, I point out the various uses and types of cloud to give investors an idea of exactly how large the implications of cloud computing are to both businesses and individuals and stress how this sub-sector is still in its relative infancy. It is my opinion that by creating a fund that is about 30% blockchain-focused (financial) and 70% cloud-focused that we can offer investors the best of both worlds with a concentrated portfolio built for growth in two newer technologies. While portfolio turnover is expected to be low, we chose to make BKCH actively managed so that we can adapt with the inevitable breakthroughs and changes within the two sub-sectors and have the flexibility to add companies into the portfolio as new leaders emerge. I believe we will be the only ETF offering investors direct exposure to just cloud and blockchain combined.

How does the commercial relationship between the sub-advisor, Sabretooth, and AdvisorShares, work?

AdvisorShares is the ETF issuer who has the legal bearing to actually issue the ETF. Sabretooth Advisors is the sub-advisor who manages the portfolio and fund for AdvisorShares.

Your fund uses moving averages, as well as more familiar metrics like market cap and momentum, to pick tech stocks. What's the rationale for using moving averages?

Moving averages give you an idea of the trend of the stock, be it a short term or long-term time frame. While we use fundamental analysis to select equities, moving averages assist in the technical overlay used for determining the optimum entry and exit points, when changes to the portfolio may be made.

Some investors are worried that the valuations (especially PE and PB) ratios of these US tech companies have widened out too far. Do you think these fears have any basis?

There is always a concern about valuations and PE or PB ratios, especially during times when we see headwinds in the markets and global economy. However, we have historically seen "valuations" stretched for high growth and new technology companies with a bull/bear case being made by both sides. Keep in mind that high flying stocks such as Amazon, Alphabet, Facebook, Netflix were considered high PE and PB back in 2015 and those stocks have produced triple digit returns as they changed the ways we lead our lives. In a mature industry or sector, absent a technological revolution or major change in business model, higher than average valuations may be a cause for concern, but we have seen new businesses and innovators with high valuations grow at such a degree that forward PE or PB is significantly less than the current year, and even in line with current market values. In a nutshell, I'm not concerned with the current valuations in the sectors seeing mid to high double-digit growth year over year, but I would be concerned with excess valuations in mature companies moving from growth to value.

Where do you see the market for this type of product?

I feel this product fits into portfolios in a few ways. It can be a core holding for investors looking for cloud and blockchain exposure and looking to minimize the single stock risk of just picking one or two companies in the space. It can be a satellite holding for investors with a core portfolio of different index products that are looking to generate alpha through a specific high growth sub-sector of cloud and blockchain. It can also be a short-term trading vehicle for investors with shorter timeframes looking to take advantage of a concentrated portfolio of high growth names that have generally returned daily returns in excess of the broad market levels both up and down.

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Photo: Scott Freeze. Source: Supplied.

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