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How the 'Smart Home ETF’ Actively Tries to Balance Risks and Opportunities

20 September 2023

 

In our last blog, Dasym CIO, Peter van Rooyen, explained the multi-layered thematic active investment approach that the Smart Home UCITS ETF (CAVE) deploys. This month I spoke with smart home fund manager, Seb de Feiter, to discuss the advantages of active management.

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Actively Selecting Fitting Companies

Unlike most single themed ETFs that are passively managed and follow an index of companies associated with a certain industry (e.g. cybersecurity, AI), a complex theme like smart home requires active management.

Why? Because a multi-layered active approach ensures that CAVE can provide undiscovered upside by including less obvious beneficiaries of the smart home theme that could be part of another sector or industry. As discussed in the previous blog, the active manager (in this case Seb) can select the right names and adjust the ETF portfolio when necessary.

But active management has still more advantages, as Seb explained to me. It helps to better manage risks, an advantage in the current uncertain time. Based on new information or insights, he adjusts and balances exposure to themes, sectors, factors and stocks. That flexibility enables us to benefit from temporary over-reactions to good or bad news, and to quickly adjust if an idea does not work out or macro-economic circumstances change.

Benefitting From Opportunities

Active management also offers the opportunity to benefit from short-term market over-reactions. Since most smart home themes take a bit more time to materialize – especially in the case of the less obvious second and third order effects – CAVE often buys under-appreciated, or sells over-valued, stocks based on Seb’s thematic view.

AI is a good example. Several companies – including not only the magnificent seven (Apple, Microsoft, Nvidia, Amazon, Meta, Tesla, and Alphabet), but also network equipment company Arista – received a significant stock price boost from AI1. The CAVE portfolio owned several of these stocks but reduced its holdings at high valuations, reinvesting in other – less obvious or maybe even counterintuitive – companies that will benefit from AI.

Last May, for example, the education sector was hit hard when ed-tech company Chegg (which offers a direct-to-student learning platform) reported that ChatGPT was affecting its subscriber numbers2. Other education companies also felt the impact, even if their businesses were completely different, creating buying opportunities. Seb mentions PowerSchool,3 which provides business software running core applications for educational institutions. We recently increased CAVE’s stake in this company since it actually benefits from AI, using it for example, both to identify students who need support and to develop personalized learning solutions. Obviously it is uncertain if the expected benefit will materialize. We may reduce CAVE’s exposure to this company in the future.

Another example is found in music, where music stocks fell back last April when an illegal AI-generated imitation of Drake and the Weeknd went viral before streaming services took the fake down.4 As described in the Music Everywhere blog last June, we believe that AI is actually an opportunity for the music industry to improve quality, create new music experiences and increases the value of music made by real artists. This view drove our decision to increase the stake in Universal Music.

At the same time, investors must consider the related risks when investing in CAVE, such as market risk, sector concentration risk and risk of new technologies.

Managing Risks and Rewards

Turning to risk more specifically, Seb uses the shopping theme as an example, which is based on people buying more online. Nevertheless, the uncertainty surrounding consumer financial health is leading to challenging conditions for some ecommerce names. To balance that risk, Seb and his team take into account the whole value chain to lower the risk and still have exposure to the theme.

How does that work out? Well, CAVE still has retailers such as Lululemon in portfolio, but also includes payment companies like Visa, logistics companies such as Inpost and DHL, and companies providing warehouse solutions like Gxo Logistics or Terreno Realty.

Moreover, aside from changing exposure within the theme, Seb mentions that they also shifted exposure to other themes. While CAVE still has shopping companies in its portfolio, we have included more healthcare companies (see also our previous blog on this theme), since health is less reliant on the economic cycle.

Balanced Exposure to Secular Trends

By managing risks and opportunities, CAVE aims to create an attractive long-term investment proposition. Balancing the weights of different themes, sectors and factors diversifies exposure to a multitude of secular trends. At the same time, that balancing game reduces risk, improving CAVE’s risk-return profile.

1 See e.g., https://coinunited.io/news/en/2023-07-09/stocks/cunews-tech-s-magnificent-7-soar-amid-ai-boom-but-skeptics-warn-of-fading-stars

2 https://www.theguardian.com/business/2023/may/02/pearson-shares-fall-after-us-rival-says-ai-hurting-its-business

3 https://www.bizjournals.com/sacramento/inno/stories/news/2023/05/08/powerschool-artificial-intelligence-concerns.html

4 https://www.nytimes.com/2023/04/19/arts/music/ai-drake-the-weeknd-fake.html

Important Disclosures

For informational and advertising purposes only.

This website originates from VanEck (Europe) GmbH and VanEck Asset Management B.V., a UCITS Management Company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH, with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin). The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck (Europe) GmbH and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index.

VanEck Asset Management B.V., the management company of VanEck Smart Home Active UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, engaged Dasym Managed Accounts B.V., an investment company regulated by the Dutch Financial Service Supervisory Authority (AFM), as the investment advisor for the Fund. The Fund is registered with the Central Bank of Ireland. The value of the ETF’s assets may fluctuate heavily as a result of the investment strategy.

Investors must read the sales prospectus and key information document before investing in a fund. These are available in English and the KIIDs/KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the local information agent details to be found on the website.

All performance information is historical and is no guarantee of future results. Investing is subject to risk, including the possible loss of principal. You must read the Prospectus and KIID/KID before investing.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

© VanEck (Europe) GmbH / VanEck Asset Management B.V.

Important Disclosure

This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.

This information originates from Dasym Managed Accounts B.V. with registered address at Flevolaan 41 A, 1411 KC Naarden, the Netherlands (DMA), DMA is an investment company incorporated under Dutch law and regulated by the Dutch Authority for the Financial Markets (AFM) and the Dutch Central Bank (DNB). The information prepared by DMA is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. The views and opinions expressed in this presentation are those of the author(s) but not necessarily those of DMA. DMA and its associated and affiliated companies (together “Dasym”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. Dasym makes no representation or warranty, express or implied, as to the accuracy or completeness of any of the information contained in this blog. Dasym undertakes no responsibility to update the information prepared by it and contained in this blog.

This information is published by VanEck (Europe) GmbH. VanEck (Europe) GmbH, with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin). The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck (Europe) GmbH and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck assumes no liability for the content of any linked third-party site, and/or content hosted on external sites. Brokerage or transaction fees may apply.

VanEck Asset Management B.V., the management company of VanEck Smart Home Active UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, engaged Dasym Managed Accounts B.V., an investment company regulated by the Dutch Financial Service Supervisory Authority (AFM), as the investment advisor for the Fund. The Fund is registered with the Central Bank of Ireland and actively managed. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs/KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the following local information agents:
UK - Facilities Agent: Computershare Investor Services PLC
Austria - Facility Agent: Erste Bank der oesterreichischen Sparkassen AG
Germany - Facility Agent: VanEck (Europe) GmbH
Spain - Facility Agent: VanEck (Europe) GmbH
Sweden - Paying Agent: Skandinaviska Enskilda Banken AB (publ)
France - Facility Agent: VanEck (Europe) GmbH
Portugal - Paying Agent: BEST – Banco Eletrónico de Serviço Total, S.A.
Luxembourg - Facility Agent: VanEck (Europe) GmbH

Performance quoted represents past performance. Current performance may be lower or higher than average annual returns shown. Discrete performance shows 12-month performance to the most recent quarter-end for each of the last 10 years where available. E.g. '1st year' shows the most recent of these 12-month periods and '2nd year' shows the previous 12 months period and so on.
Performance data for the Irish domiciled ETFs is displayed on a Net Asset Value basis, in Base Currency terms, with net income reinvested, net of fees. Returns may increase or decrease as a result of currency fluctuations.

All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Dasym and VanEck.

© VanEck (Europe) GmbH / Dasym Managed Accounts B.V.

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