A diversified portfolio of blue-chip stocks and bonds is generally the best and least risky path to building long-term wealth.
But for investors seeking to sprinkle some excitement and, hopefully, additional gains to a portfolio, a little exploration away from their core holdings into thematic investments such as biotech and cybersecurity can’t hurt.
“If you have the comfort taking on a little more risk while seeking to juice returns a bit, you may want to look at niche ETFs [exchange-traded funds],” says Craig Ellis, portfolio manager with Bellwether Investment Management Inc.
These ETFs are often the least risky way to gain exposure to the potential upside of volatile parts of the market. Rather than trying to pick one or two winning stocks, you’re buying a basket of companies – hopefully more good than bad, Mr. Ellis adds.
For intrepid investors looking to buy into a high-flying sector, or to get ahead of the curve with the next big thing, the following ETFs bear consideration.
Biotech has long been a go-to sector for investors with an appetite for risk. It’s home to smaller drug companies aiming for breakthrough therapies for cancer and Alzheimer’s, for instance. A few years ago, biotech was the “it” sector, Mr. Ellis says. “In 2018 it’s done okay, but if you look at the last several years, the sector has fallen out of favour.” Still, this iShares ETF has a long history of tracking the sector and has provided good returns; since its inception in 2001, its average annual return is more than 7.25 per cent. Still, the risks are many. Most stocks are volatile, and a good number will never be profitable. But a few will be, perhaps wildly so, and that’s what makes the IBB worthwhile, he says. “You’re picking up a lot of small companies you’ve probably never heard of, and obviously the hope is that among those, some will find a cure for a really bad disease.”
Technology is another longstanding sector offering high rewards along with plenty of risk. Within that sector is the cybersecurity subsector, which is increasingly on the minds of consumers, industry and investors. “Everyone is pretty aware of ongoing attacks on major companies with people’s private information being stolen,” Mr. Ellis says. HACK is a good option for those with a long view on investing because, right now, the segment is pricey. “These are often high-growth companies where you’re hoping in the next five years they grow cash flows and earnings at a rapid pace, eventually growing into their present, high valuations,” he says. The fund has performed well, growing more than 30 per cent in the past year. But Lara Crigger, senior editor with ETF.com, notes that less-costly, more-diversified technology ETFs have done better, including First Trust Dow Jones Internet ETF (FDN) and the Vanguard Information Technology Fund (VGT). Still, specialized ETFs such as HACK are a good option for true believers in cybersecurity and other areas such as blockchain, Ms. Crigger adds. In fact, investors can now buy a blockchain ETF, the Horizons Blockchain Technology & Hardware Index ETF (BKCH), launched in June.
Investors considering capitalizing on the buzz about renewable energy, water conservation and energy efficiency should give PZD some thought, says Tim Nash, an economist and investment advisor specializing in cleantech investments. “PZD is the broadest, most diversified green-technology ETF,” says the founder of Toronto-based Good Investing. After posting double-digit percentage annual gains for the past few years, the fund still has room to grow, Mr. Nash argues, “as younger generations are more concerned about climate change and are keen to build a green economy.” Moreover, robo-advisory firm Wealthsimple now offers a socially responsible portfolio that includes PZD, adding to its popularity. A key risk is the current presidential administration in the United States, which is not as supportive of the cleantech industry as the previous one. Still, Mr. Nash argues the ETF has gained more than 12 per cent in the past year, albeit that lags behind an ETF tracking the performance of the S&P 500.
Cannabis stocks have made headlines this year. While investors have earned fortunes on single companies, those late to the game might consider an ETF to spread risk, Mr. Ellis says. Listed on the TSX, HMMJ offers broad exposure to the largest licensed cannabis producers, along with smaller ones and ancillary companies. “Certainly, it’s a recommendation if you’re intent on entering the sector,” he says. The ETF also holds companies from the U.S. and other countries, but its ex-Canada content is not as high as the ETFMG Alternative Harvest ETF (MJ), listed in New York. Only about 55 per cent of the companies it lists are Canadian compared with more than 75 per cent for HMMJ. This is an important distinction given that the speculation over U.S. legalization is driving the interest of U.S. investors, Ms. Crigger says. But there’s a catch, and that’s “the fact that marijuana isn’t legal in the U.S.” This causes several challenges not just for investors but also for banks serving the industry, including those involved with MJ. She points out that the ETF recently switched its custodian and transfer agent banks, a move that “could dramatically impact how well the fund trades.”
Commodities are renowned as feast-or-famine investments. Of late, palladium has been satiating investor greed. Driving growth is its use as a component in catalytic converters for automobiles, Ms. Crigger says. Moreover, China has been pushing demand to meet aggressive climate-change goals. “We’ve also got this on-and-off trade war between China and the U.S., and there is some indication China has been buying [palladium] up to mitigate the impact of [expected] tariffs.” She adds this may explain why the ETF has been up about 13 per cent since the start of September. Beyond recent drivers, she notes, the commodity has strong fundamentals given the long-term trend toward reducing emissions. Still, Ms. Crigger says palladium makes up a relatively small part of the commodities market compared with gold and silver, making it more volatile. As well PALL comes with high management costs compared with gold and silver ETFs.