Five niche ETFs that captured investor attention in 2021

Exchange-traded fund providers continue to seek new themes to lure investor interest – and 2021 was no exception.

The need to turn heads was arguably even greater this year given the launch of more than 600 ETFs year-to-date, including about 200 in Canada, says Daniel Straus, director of ETFs and financial products research at National Bank of Canada Financial Markets.

“Just by nature of the fact [that] the ETF is a very convenient container for almost anything, it’s not surprising that almost every idea that might resonate with a tiny corner of the marketplace is going to get thrown at the wall at some point,” Mr. Straus says.

While cryptocurrency and sustainability themes remained popular, the list of more niche ETFs grew larger this year, Mr. Straus adds, including those providing exposure to magic mushrooms and alternate universes. Here is a look at five ETFs, launched in 2021, reflecting a few of those emerging, out-of-the-box trends:

Horizons Psychedelic Stock ETF (PSYK-NE)

Launched: Jan. 26, 2021

Management expense: 0.85 per cent (management expense ratios are determined after one year of an ETF trading)

Performance since inception: down 45 per cent (all prices from Morningstar.ca as of Dec. 9 close)

PSYK is the world’s first ETF providing exposure to growing research and commercialization of psychedelics, which includes LSD and magic mushrooms.

“When I saw this launch, I said, ‘What!?’” recalls Eric Balchunas, senior ETF analyst with Bloomberg Intelligence in New Jersey.

Yet PSYK is not as off the wall as it might appear, he adds, noting psilocybin – the active ingredient in magic mushrooms – has shown promise in treating mental illness in early research.

PSYK’s top holding, Compass Pathways, recently announced positive results using psilocybin to alleviate treatment-resistant depression.

Two other ETFs – Defiance Next Gen Altered Experience ETF (PSY-A) and AdvisorShares Psychedelics ETF (PSIL-A) – have since launched with similar sector exposure.

Mr. Balchunas refers to these ETFs as “hot sauce” for well-diversified portfolios, providing less risky alternatives to stock-picking for investors seeking exposure to volatile but promising market corners.

Evolve Metaverse ETF (MESH-T)

Launched: Nov. 29, 2021

Management expense: 0.60 per cent

Performance since inception: down 3 per cent

With Facebook’s name change to Meta Platforms Inc., emphasizing its growing focus on virtual reality and related businesses, it was only a matter of time before an ETF emerged aiming to capture growth of the fast-expanding ‘metaverse,’ Mr. Straus of National Bank says.

“I have a soft spot for this theme,” he says, since the term ‘metaverse’ is derived from the popular science fiction novel Snow Crash, that he considers “visionary … but portraying a dystopia.”

That’s in contrast to the market’s vision of a utopian metaverse backed by emerging technologies like next-generation 3D, he adds.

Launched within days of Horizons Global Metaverse Index ETF (MTAV-T), which claims to be Canada’s first index-based metaverse ETF, neither one was first in the world to market with Roundhill Ball Metaverse ETF (META-A) listing in the U.S. in June.

MESH is unique, however, as the only equal-weight fund so far. Included in its 25 holdings are video game maker Activision Blizzard Inc. (ATVI-Q) and, of course, Meta.

As Mr. Straus further notes, “you’re mostly getting mainstream internet, Silicon Valley and gaming companies.”

The FOMO ETF (FOMO-A)

Launched: May 25, 2021

Management expense: 0.90 per cent

Performance since inception: down 9 per cent

The FOMO (fear of missing out) name says a lot. Investors fearing missing out on fast-rising stocks and sectors can presumably get on the bandwagon with FOMO, says Mark Yamada, chief executive officer of PUR Investing Inc. in Toronto.

“The premise makes legitimate sense given the success of new-fangled IPOs [initial public offerings] out there.”

Yet its portfolio looks “a lot like a large-cap” fund, he adds.

FOMO’s asset manager Tuttle Capital Management Inc. states it uses an actively managed, proprietary strategy for the fund that tactically trades in and out of popular stocks, sectors and investment themes of the day, while even holding fixed income ETFs on occasion.

Also notable, FOMO can hold special purpose acquisition companies (SPACs) and post-SPAC stocks. Among current holdings is post-SPAC company DMY Technologies Group Inc. IV now trading as Planet Labs Inc. after merging with the earth-mapping technology company by the same name.

Investors seeking exposure to meme stocks such as GameStop – made popular on Reddit – should look elsewhere though, since FOMO offers little exposure to this theme, Mr. Straus adds.

Meme ETFs include VanEck Vectors Social Sentiment ETF (BUZZ-A), listed in March, and the freshly launched Roundhill MEME ETF (MEME-A) launched in December.

With FOMO’s top holdings also including Microsoft Corp. and Costco Wholesale Corp., among other large corporations, Mr. Straus suggests investors could get similar exposure via SPDR’s S&P 500 Trust ETF (SPY-A) for a 10th of the cost. What’s more, he says, any successful former SPACs growing large enough will likely become an S&P 500 constituent.

“You could argue that SPY is the original FOMO ETF.”

Impact Shares Affordable Housing MBS ETF (OWNS-A)

Launched: July 26, 2021

Management expense: 0.49 per cent

Performance since inception: down 1.4 per cent

Impact’s ETF builds on the popularity of responsible investing by backing loans to communities historically underserved by mortgage lenders.

“It’s actually doing something good” investing in neighbourhoods in U.S. cities where banks typically “won’t lend money,” Mr. Yamada says.

OWNS is the most recent addition to Impact’s lineup for those seeking investments with a beneficial social impact. Other ETFs include YWCA Women’s Empowerment ETF (WOMN-A), listed in 2018, investing in companies driving social change.

OWNS differs as a fixed income offering, mostly holding mortgage-backed securities – issued by government-sponsored providers like Fannie Mae – with at least 51 per cent of mortgage for low- and moderate-income borrowers in mostly non-white communities.

Impact states the ETF’s lowest possible yield is 1.66 per cent, though most holdings include long-term mortgages with interest rates averaging about 3 per cent.

LifeGoal Children Investment ETF (CHLD-A)

Launched: September 9, 2021

Management expense: 0.87 per cent

Performance since inception: down 1.5 per cent

CHILD offers a new spin on thematic ETFs as a strategy for parents seeking to save for their kids, Mr. Balchunas says. Arguably, the ETF could replace advisers who typically assist clients with saving for college for their children and other goals like sports and daycare costs, he says.

“It’s really an ETF that holds other ETFs – that’s essentially what an adviser would do for you.”

Mostly a bond fund, its roughly 30-per-cent equity allocation involves stocks of clothing and entertainment companies, “which might profit from raising children,” including Wal-Mart Stores Inc., Mr. Straus says.

Yet even CHILD has some FOMO exposure with small allocations, for example, to cryptocurrency. Mr. Straus notes individuals serious about postsecondary saving are likely better served using an adviser or robo-advisor that can adjust holdings as children get closer to enrolment, something CHILD does not.

“Still, like the rest of these ETFs, it’s an interesting example of new products out there.”