Investing In The Economy Of The Future

I skate to where the puck is going to be, not where it has been. – Wayne Gretzky

By Carol K.

I have argued for many years, and contrary to popular opinion that self-directed investors (SDI), who are not subject to the constraints of a professional portfolio manager, can outperform passive/indexed managed funds.  SDIs must be willing to put in, at minimum, a significant amount of time and effort to screen, analyze, and construct a portfolio of high-quality stocks.  While the macro boys at GMM are off hunting Black Swans,  I am making money to keep the lights on.

Futuristic Sectors

In researching companies operating in specific niche sub-sectors, we consider to be best positioned and sustainable and healthy future growth, I have concluded that an actively-managed ETF makes the most sense.  It is a more efficient use of my time and, more importantly, taps the expertise of the manager to provide a higher risk-adjusted return.

Until recently, my portfolio typically held high-quality dividend growth stocks providing a significant amount of annual income.  I’ve recently taken profits in several names, which I’ve owned for several years.  I believe we’re facing a longer than expected recovery period from the economic damage inflicted by COVID-19, and many of the stocks I sold will suffer as a result.

Political Risk

Also, as we at GMM have posted on several occasions, a clean sweep by the Democrats, which is looking increasingly likely, will result in both an increase in individual and corporate income taxes.  Furthermore, changes to capital gains taxes, and the treatment of dividend income are also a high probability.  At some point, we suspect the market to begin pricing these events, which will be stock market negative.  Let me stop there and leave the political speculation to others.  Not my purpose here.

Future Sustainable Growth Industries

The main focus of my current portfolio analysis is on sub or micro-sectors, which focus on the economy of the future, such as genomics, artificial intelligence, robotics, 5G technologies, and the Internet of Things (IoT).  These sectors are dominated mainly by higher-risk small-cap and micro-cap stocks.  Some of these companies may or may not become “The Next Big Thing;”  some will be taken out by more prominent names in the technology/healthcare sectors, and some will go bankrupt.

Specialization Of Labor

I must confess that analyzing these less established micro-cap stocks isn’t my strength or comparative advantage. I’ve found small and micro-cap companies much more difficult to evaluate using the metrics that have served me well in the large-cap space.  Moreover, the growth trajectories of smaller cap companies in such niche sub-sectors are often far less predictable.  Many of these “story stocks of the future” are relatively newer companies, have very little analyst coverage, and limited public information available.

Thus, in this particular situation, I believe an actively-managed ETF with an experienced and knowledgable portfolio manager makes more sense than picking individual names.  Yes, you will likely pay a higher expense ratio for an actively managed, niche area ETF, but the additional returns with less aggravation are worth it.  The table below illustrates that even many of the passive ETFs operating in niche GICS classifications sport expense ratios almost as high as the actively managed, and they merely track an index!

If you’re still not convinced, an expense ratio in the ballpark of 0.75% is still far below the fees for a typical actively managed mutual fund or a closed-end fund (CEF).

ETFs For The Future

I’ve put together the following table of some of the top-performing ETFs for the year, focused on artificial intelligence, robotics, cloud computing, genomics, fintech, and the Internet of Things (IoT) as of the August 5^th market close.  There are many other ETFs in this space, which I did not include a fund if their three-month average daily trading volume is below 10,000 shares. Several ETFs have performed exceptionally well this year yet are not included because they are so thinly traded, some as little 750-1,000 shares per trading day.  Even if you’re a small investor looking to pick up a relatively small number of shares, I have found that the lack of liquidity and the wide bid/offer spreads in such thinly traded stocks is suboptimal.

The table illustrates the ARK Invest family of actively managed ETFs have outsized returns — especially when compared to SPY’s (S&P 500 index fund) YTD return of 3.85%.  Some of these ETFs hold a significant position in Tesla (TSLA) – a few close to 10 percent of its holdings.  Tesla is up over 230 percent YTD.

The ARK ETFs also meet my liquidity requirements, with the average daily shares trading in the hundreds of thousands over the past three months.  I’ve initiated starter positions in ARKQ (Autonomous Technology & Robotics ETF) and ARKG (Genomic Revolution ETF) and will launch a position in ARKW (Next Generation Internet) on the next pullback.

Another exciting play with a lot of growth in its runway, which has suffered after the March COVID-crash, is the ETFMG Prime Mobile Payments ETF (IPAY).  I’ve held this in my portfolio in the past, and it has performed quite well for me.  The ETF has holdings in the biggest names in the payments space,  such as Square, PayPal, Visa, Mastercard, Fiserv, etc.. It’s YTD performance has surprisingly lagged its historical “growth” status, even though the global COVID lockdowns have created explosive growth in online retail.  It’s a fund that I am keeping on my watchlist and hope to reenter soon.

Focusing on total return is what it’s all about investing with a long term horizon. While most of my focus is on high-quality companies, which pay a reliable and steadily increasing dividend, I do not shy away from opportunities in the high growth story sectors of the economy.  Investing in the trends that will drive the economy of the future can generate explosive returns, but it is not easy as it seems to pick the winners,  which is why I prefer managed ETFs.

Disclaimer: I am not offering financial advice, nor am I a financial advisor. I hold no professional certifications. I do not manage money/investments professionally for third parties and only manage only my portfolio and assist family members’ with their investment portfolios.  I am a member of the Global Macro Monitor (GMM) team, with my main focus on stock picking. Information provided in this post is not investment advice, and my conclusions are based on my analysis.  Investors should consider performing their in-depth due diligence before buying or selling securities.