Whatever the future, Defiance has a new thematic ETF that intends to capture it.
Defiance, an ETF provider whose thematic suite is mostly targeted at millennials, is listing an ETF that tries to draw alpha from changes in how food is made and consumed. The Defiance Next Gen Food & Agriculture ETF (DIET) tracks in index from BlueStar, an Israeli index house, and will list in the US this week.
The index DIET tracks is tiered, like many other thematic ETFs, with different tiers getting different weights. The index starts by classifying putting companies into agriculture-type boxes depending on how they make the majority of their revenue. Those that make enough revenue in any of the following food-related activities are included.
Tier 1 – 40% index weight. Targets companies building irrigation systems, plant seed modification, vegan or plant-based branded foods, water meters, sustainable protein producers, fertilisers, and pesticide
Tier 2 – 50% index weight. Is made of companies in: flavours and fragrances, baby food, alternative sweeteners and agricultural chemicals.
Tier 3 – 10% index weight. Takes companies from agriculture services, farm equipment and machines, or diagnostic equipment used for food production and safety
Tier 4 – 10% index weight. Is made of companies in: livestock feed and pharmaceuticals or veterinary equipment, or branded foods.
Companies within each group are market weighted. The fund will hold around 70 constituents.
Analysis – interested idea; difficult index
Agriculture companies have underperformed recently, but that could well change in the future. As global warming, desertification, population growth and millennial consumption habits begin to shape the market, agriculture could be the future tech sector. (If this sounds implausible, just look at the multiples marijuana farmers are trading on).
While the investment thesis driving this fund is compelling, the index DIET tracks has potential problems.
Most obviously, the tiers used by DIET are a bit wobbly. Why, for example, is veterinary equipment in tier 4 while diagnostic equipment is in tier 3? And why do tier 3 and 4 get the same weight? For that matter, why have so many tiers? The logic behind these moving parts is under-explained.
Another potential difficulty is how these companies get classified in the first place. The prospectus says BlueStar looks at: financial statements, annual reports, investor presentations, analyst reports, and industry-specific trade publications. That's a lot of paperwork; reading it all would be truly Sisyphean labour. How are they going to go through it with any thoroughness? And will it matter if they don't?
Still, this is an interesting idea and could be one to watch.