J.P. Szafranski, BridgeTower Media Newswires
Plant-based eating is a fascinating phenomenon that seems to be a durable trend, especially among younger consumers. With all such trends, investors are tasked with thinking about the opportunities and threats that arise as a result.
With a seemingly endless supply of exchange-traded funds available, one of the easiest ways to express a market view on a given sector is to purchase an ETF, which tracks a relevant index. This is especially useful for individual investors who might not have time to research and keep track of the many individual stocks required for a well-diversified portfolio.
Enter Beyond Investing’s US Vegan Climate ETF (ticker: VEGN), which launched last September. It seeks to track the performance of its proprietary index, the Beyond Investing US Vegan Climate Index. On the surface, such a branded ETF sure sounds like a great way to play the plant-based eating trend, with the added popular appeal of being an index fund!
What are the top five holdings of the Vegan fund (as of Dec. 31)? Apple Inc., Microsoft Corp., Facebook Inc., UnitedHealth Group Inc., and Verizon Communications Inc. It doesn’t look so plant-based, does it?
In actuality, VEGN seeks to own large-cap U.S. companies based upon a variety of ESG (Environmental, Social, Governance) criteria. The fund description specifies a focus on avoiding companies involved in animal harm and exploitation, fossil fuels, environmental damage and human rights.
To Beyond Investing’s credit, the fund materials are transparent about the approach of their proprietary index. It certainly looks like many other ESG-based strategies. There simply aren’t enough investable public companies for a pure-play plant-based fund, certainly not in the large-cap category. That’s not the fault of the fund managers but it is a little confusing for an investor to see “Vegan” in the fund name.
The fund’s holdings look an awful lot like a large-cap growth index. With an array of super low-cost ETFs built to track the large-cap growth style, time will tell whether VEGN’s screening approach adds sufficient value to justify its current expense ratio of 0.6%.
There are many other examples of branded exchange-traded products that require more than a cursory look for individual investors prior to jumping in. The Grayscale Bitcoin Trust (ticker: GBTC) is an eye-opening example. GBTC is a trust formed to own Bitcoin which trades over-the-counter. Each share of the trust effectively owns just under 0.001 Bitcoin, according to current publicly available information on Grayscale’s website.
With that information, it’s easy enough to calculate how much economic value one share of GBTC holds. However, the market price of GBTC is set by incremental buyers and sellers in the over-the-counter market. Currently, an investor must pay a premium of over 20% for the privilege of owning a share of the trust versus simply buying actual Bitcoin. In other words, it currently costs over $1.20 to buy $1.00 worth of Bitcoin. The trust also has an annual fee of 2%.
The premium to underlying Bitcoin value soared over 100% back in 2017. As Bitcoin was hitting its record levels in December 2017 of around $18,000 per Bitcoin, an investor would have had to pay twice that price for an equivalent amount of GBTC shares. Ouch.
Things are not always as they seem when it comes to exchange-traded products. It’s best to peel back some of a fund’s layers prior to jumping in.
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J.P. Szafranski is CEO of Meliora Capital in Tulsa (www.melcapital.com).
