The global ETF industry continues to experience tremendous growth, with an average CAGR of 21%. The trends responsible for shaping the investment markets have worked in favor of the best ETFs. The influencers include global themes like the shift to self-directed retirement savings.
Other critical factors around the ETF industry include economic factors, regulatory efforts, technological developments, and investment themes. Supported by these elements, the best ETFs will continue to experience rapid global expansion. According to the trends, the ETF industry is outgrowing the broader asset management industry.
Read on to learn more!
What Does the ETF Industry Entail?
ETF refers to an Exchange-Traded Fund traded on the stock exchange markets. It sells and buys in the same way as stocks. An ETF comes in the form of assets like commodities, stocks, and bonds. The mechanism of ETF operation is designed to keep it trading as close as possible to its net asset value.
However, variations can occur every once in a while but not so much as to affect trade. ETFs remain the most attractive types of investment because they're cost and tax-efficient and also come with stock-like features.
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Types of ETFs
Investors have access to a wide variety of ETFs. They can use them for income generation, price increases, speculation, and hedging. They can use ETFs to offset risk in their investor portfolio partly.
Common types of ETFs include:
- Bond ETFs like government, state, and local bonds as well as corporate bonds
- Industry ETFs that track a specific industry like banking, technology, or the gas and oil sector
- Commodity ETFs like gold and crude oil
- Currency ETFs that invest in foreign currencies like the Euro or Canadian dollar
- Inverse ETFs that attempt to earn gains from stock declines by shorting stocks
Shorting refers to the process of selling a stock, hoping it'll decline in value to repurchase it at a lower price.
ETFs trade through both online and traditional broker-dealers. It's essential to check that one is investing in the real ETFs and not ETNs (Exchange Traded Notes). ETNs are bonds that trade like stocks but are backed up by an issuer like a bank.
Should you invest in an ETN, ensure it’s the right fit for your investment portfolio.
Among the many types of ETFs, the focus here is on industry ETFs. There are several of them that investors prefer to trade in since they qualify among the best ETFs in the market.
1. Esports and Gaming ETFs
Research shows that the electronic sports industry will generate revenue of over $1 billion in 2019. The esports industry is the business of competitive gaming in front of an interested audience of 454 million viewers. It includes anything from watching a game, all the way to significant events like the Intel Extreme Masters.
Some of the secular trends that dominate the industry today include multiplayer games and the frequency of streaming. It’s this definition that led two Roundhill and Bitkraft to select the best stocks, mostly made of game publishers like Activision Blizzard and Take-two.
NERD
Roundhill Investments partnered with esports investor Bitkraft Esports Ventures to launch the NERD ETF. This was after the realization of the excitement around the private markets.
Investors with interest in the esports industry can now get the most out of investment with the new NERD ETF. This ETF just started trading recently but is a ticker in the industry. NERD actively tracks streaming network operators, video game publishers, and hardware companies well established in the industry.
NERD ETF comes in first place among the ETFs that are actively concerned with the esports space. According to a founding partner at Bitkraft, the new ETF NERD takes a more consumer-based approach. It aims at capturing the companies which are most actively involved in esports. Esports consumers want to invest their money where they believe the future is.
2. Cannabis ETFs
The Cannabis industry is another rapidly expanding industry. Its ETFs are also gaining momentum, with a prediction that it’ll be a $1 billion EFT in 2019. The launch of cannabis ETFs turned heads and opened pocketbooks because of its unique approach to cannabis investing.
Cannabis ETFs tend to invest biotech and pharmaceutical companies involved in cutting-edge research of medical applications for cannabinoids. They also supplement their exposure in the cannabis industry with companies that support cannabis growth.
The main Cannabis ETF player on the market for the last two years has been the ETFMG Alternative Harvest ETF. Originally it was a Latin American real estate fund, but with time changed to a cannabis fund.
The Securities and Exchange Commission wasn’t happy with the move. Since then, it has put strict measures on companies that want to launch cannabis ETFs. Two launches that have been successful in 2019 are as follows.
AdvisorShares Pure cannabis ETF YOLO
This was launched in April 2019 and differs from MJ in that companies in the cannabis industry actively manage it. The largest holding is OrganiGram Holdings, while the largest holding of MJ is GW Pharmaceuticals.
The Cannabis ETF THCX
This one is just a few days old and is passively managed. With 35 holdings, it comes with the cheapest expense ratio of 0.7%. The most substantial holdings are Tilray TLR and Cronos Group CRON.
A third company that is set to launch its ETF is Amplify. Another fund under the ticker TOKE is also set to be launched in the coming weeks. Another ticker is ACT that comes in the fund name AdvisorShares Vice ETF.
With the booming investment opportunities, the cannabis industry is predicted to blast from $6.7 billion to $20.2 billion in 2021. Investors who swing into action early enough will make the most out of their investments.
Related: ETF vs Mutual Fund vs Index Fund: Knowing the Differences
3. Solar ETFs
Alternative energy has become increasingly prominent in the energy consumption front. It has also become an attractive investment sector for investors looking for lucrative investment opportunities. Many are the energy ETFs on the market today, but only a few of them are truly clean and outstanding.
The data available confirms that there’s a great move from traditional fossil fuels to clean energy sources. As an example, the state of California put a mandate on all homes built from 2020 to have solar panels. Other data shows renewable energy sources are putting pressure on traditional power sources like coal.
The competitive environment has seen the prices of renewables fall. The cost of natural gas is also expected to remain low in the foreseeable future. As such, here are some of the best ETFs to consider in the energy sector.
ALPS Clean Energy ETF (ACES)
The expense ratio of ACES energy ETF is 0.65% per year. It’s among the newest and cleanest, ETFs having come into the market in June 2018. The ETF is attractive to many investors because of its multi-theme nature.
Its focus is on electric vehicles, alternative energy, solar, wind, biomass, smart grid, and geothermal fuel stocks. As such, it has a broader reach than most other already established energy ETFs.
ACES ETF holds 34 stocks, and its largest holding is CREE at 5.75%. The list of the other constituents is companies whose primary operations are mainly geared towards clean energy.
Invesco WilderHill Clean Energy EFT
The expenses ratio stands at 0.70% yearly. In a few months, the ETF will be 14 years in the market. It has withstood the stand of time as one of the clean energy ETFs on the market today. The largest holding is PWB, with other stocks of companies publicly traded in the United States.
The average value of all the holdings is $4.7 billion, which indicates that this energy ETF is a mid-cap fund. Better still, over 48% of PWB stocks are classified as growth stocks.
VanEck Vectors Global Alternative Energy ETF (GEX)
The VabEck Vectors Global Alternative Energy ETF is another clean EFT. It comes with multiple applications across the alternative energy landscape. GEX holds about 30 stocks spreading across biomass, hydro, solar and geothermal companies as well as related companies.
The ETF offers a level of renewable purity because of the underlying index mandates. About 4% of GEX’s components aren’t large or mid-caps.
Invesco Solar ETF (TAN)
Invesco is another among the largest clean energy ETFs despite its focus on a single segment of the alternative energy sector. Solar ETF stocks are among those struggling so far, with a decline of about 20%. However, it's one of the best ETFs to watch out for in 2019.
It's essential to take note that compared to other industry ETFs, solar ETFs are lagging behind. The global solar industry has had to contend with China imports. This has seen a lot of companies go out of business while others are merely struggling to get by.
The fall in oil prices has also put pressure on shares of renewable energy companies. Some companies in the group are trading at 15% to 20% lower than standard rates.
4. Technology ETFs
Technology ETFs comprise of stocks focused on software and services, electronic equipment, communications, and semiconductors. Recently, the sector underwent several essential changes that have seen many companies move to the communication sector.
Nonetheless, the sector still provides a substantial portion of significant gains in the stock market. Some of the best EFTs in the industry includes the following:
Invesco Dynamic Software
With returns of 15.5% in 2018, it was among the best-performing stocks. The fund has a particular interest in U.S software companies and has selected a pool of 30 stocks. Some of the factors for consideration during the selection are stock valuation, risk factors, and style classification.
About $228 million of the fund’s assets are pooled from small and micro-cap stocks.
iShares Expanded Tech-Software Sector ETF
This ETF comes in the second position among information technology ETFs in terms of overall returns. Its focus is mainly on North-American software companies but also indexed by Canadian and U.S. stocks.
The fund has assets under management worth $1.64 billion and offers access to a large and highly liquid fund.
SPDR S&P Software & Service ETF
This fund comes in third place in information technology ETF. It generated returns of 7.46% in 2018. The fund concentrates on a small number of large and dominant companies by equal-weighting the companies’ portfolio.
This helps in the redistribution of what would otherwise be a heavy concentration in top companies.
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5. Biotech ETFs
ETFs in the biotech industry is in a breakout mode. Two of the main tickers in the industry are:
SPDR S&P Biotech ETF
The ticker XBI has risen by about 5%. According to experts, if you're looking for large-cap exposure, this is the one fund that stands out. XBI is equal-weighted, and investors can get closer to the mid-cap sphere of the available companies.
It’s a fund that offers a little bit more of the upside of a growth company.
iShares Nasdaq Biotechnology (IBB)
The IBB ticker rose by 3% and provides investors with mega-cap exposure. The fund weighs its holding by its market caps, where the big names in the industry account for the more significant shares. The structure provides protection when there's volatility since more prominent companies can hold better than smaller ones.
Much of the allocation of these funds is to cancer drug companies and immunotherapy. This is the kind of thing people are looking for, and they can quickly gear their investment in the funds.
Final Thoughts
When looking for the best ETF to invest in, there’s a wide variety of options available. Bonds, industry, commodity, and currency bonds are just among the many classifications. More specifically, under the industry ETFs, some bonds are taking the stock markets by storm.
Among the tickers are cannabis ETFs, Solar ETFs, Technology ETFs, Esports ETFs, and Biotech ETFs, among others. Most of them haven't been in the market for long but are promising favorable investment returns. As an investor, be aware of trends, and choose your stocks wisely.
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