Disruptive Theme of the Week: ETF Underdogs

It is always fun to root for the underdog. Who doesn’t like a good Cinderella story? In the case of “ETF underdogs,” I am referring to funds that may have received less recognition and fewer assets than their peers but are performance champions or offer differentiated exposure.Active InnovationThere are plenty of thematic ETFs focused on disruptive innovation. That said, here are a few lesser-known ETFs in the category that have racked up some stellar YTD performance. While the behemoth of Innovation ETFs is still the ARK Innovation ETF (ARKK B) with $5.7 billion in assets, it has not been this year’s champion in terms of performance, down 15.2%. One innovation underdog to consider is the Gabelli Growth Innovators ETF (GGRW C), an actively managed ETF with 30+% YTD performance but only $6.3 million in assets. Both funds have premium expense ratios due to the star power of their active managers, with ARKK at 75 bps and GGRW at 90 bps. Still, at least this year, GGRW has earned its management fee. Next up is the AXS Esoterica NEXTG Economy ETF (WUGI C), which is up almost 35% YTD. The ETF is an actively managed fund that invests in companies with exposure to 5G and 6G cellular network technology. Despite beating the largest next-generation connectivity peer, the Defiance Connective Technologies ETF (SIXG A-), in performance by more than 17% YTD, it still lags significantly in terms of assets under management with just $31 million in assets versus over $560 million. Another top-performing underdog ETF to consider focused on 5G-enabled innovation is the Clockwise Core Equity & Innovation ETF (TIME B-). It is also actively managed and comes with a hefty 1% expense ratio. However, it has racked up some stellar YTD performance, up 27.3%. But it sits at only $22 million in AUM.All That Glitters is not Gold     The next group of thematic underdog ETFs to consider are not tech-themed but involve metals and mining stocks. Playing off my section title, the first ETF to consider is the Themes Gold Miners ETF (AUMI ). The ETF has only a little over $2 million in asset but has generated performance of more than 32% YTD. Compare that to the “golden goliath,” the VanEck Gold Miners ETF (GDX B+), up 27% with $14.7 billion in assets managed. AUMI is also a little cheaper as well at 35 basis points versus 51 basis points. Some thematic underdogs are relative performance winners, not up for the year but still beating their largest peers by a great margin. A prime example is the Optica Rare Earths & Critical Materials ETF (CRIT C+), which is down 8.9% for the year – still much better than the performance of its largest peer, the VanEck Rare Earths and Strategic Metals ETF (REMX B-), which is down more than 36%. Investors wanting exposure to rare earths and critical metals might want to consider the smaller but mightier CRIT ETF. CRIT has $4.6 million in assets versus the $250 million in REMX. Also, its portfolio has benefited from less concentration and less direct China exposure. Another perfect example of an underloved underdog is the Amplify Natural Resources Dividend ETF (NDIV ). The ETF has some formidable competition in the form of the FlexShares Morningstar Global Upstream Natural Resources ETF (GUNR A) and the SPDR S&P Global Natural Resources ETF (GNR A). GUNR has $5.6 billion in assets, and GNR has $3.2 billion, compared to NDIV, which has $14.5 million. However, from a YTD performance perspective, NDIV is up 7% YTD, while its larger peers are both down marginally for the year. NDIV also offers a nice juicy annual dividend yield of 6.4%, paid monthly. GUNR’s dividend yield is only 2.6%, and GNR’s is 3.5%, with GUNR paying quarterly and GNR paying semi-annually. It might be time to give NDIV some love.Ahead of the HerdThere is an entire “herd” of cash-flow ETFs in the ETF marketplace, but the new underdogs are eating the older herd members’ lunch from a performance perspective. The Pacer US Cash Cows ETF (COWZ A-) remains the leader in size, with over $24 billion in assets. But its YTD performance is only 9.6% versus its newer peers like the VictoryShares Free Cash Flow ETF (VFLO ) and the Global X Cash Flow Kings 100 ETF (FLOW B), up 15% and 11% YTD, respectively. On the heels of this performance, VFLO is no longer an underdog, with more than $800 million in AUM. However, FLOW has only $4 million in assets. Both funds deserve a closer look.ESG UnderdogsESG as a category has become something of an underdog theme. However, some interesting ETFs in the category offer something unique in the way of exposure, unlike their larger peers. In the category of woman-themed ETFs, one of the stand-outs from an exposure perspective is the Hypatia Women CEO ETF (WCEO C+). The ETF is actively managed and invests in all publicly traded US companies with female CEOs. While its larger, woman-themed ETF peers like the SPDR MSCI USA Gender Diversity ETF (SHE B-) focus primarily on larger-cap companies, WCEO provides investors with exposure to smaller and midcap companies. This might be an interesting ETF play in a falling-rate environment. As of June 2024, the percentage of women CEOs in the Fortune 500 remains at only 10%, so the investment theme itself aligns with being an underdog. Although the VegTech Plant-Based Innovation ETF (EATV C+) has trailed its competitor, the US Vegan Climate ETF (VEGN C+), in terms of performance, up 3.6% versus 15.5% YTD, with $5.7 million in assets versus $103 million, it is a truer pure-play on veganism. VEGN’s top holdings are Nvidia and Apple, while EATV’s top names are Dole and Vita Coco. When assessing thematic ETF underdogs, you must give credit to those who stay true to their cause. For more news, information, and analysis, visit our Disruptive Technology Channel.