LGIM launches world’s first photonics ETF
Legal and General is widening out its thematic ETF suite, launching four new funds. The most interesting of which is the L&G Optical Technology Photonics ESG Exclusions UCITS ETF (LAZR), which invests in companies creating optical technology.
LAZG tracks the Solactive EPIC Optical Technology & Photonics Index NTR, which has been purpose built for this fund.
The index is made of global companies identified by consultancy EPIC as involved in photonics, which is the science of manipulating light. The photonics industry includes companies that make lasers, sensors, lights, optical fibres and TV screens, according to LGIM.
LGIM says the investment thesis is centred around robotics and self-driving cars, which need more sensors and lasers for their navigation systems. They add that healthcare and agriculture are also using photonics for diagnostics.
Bernie’s commentary – is this really a theme?
For a theme or sector ETF to work, it has to invest in companies that have some kind of common source of return. Grouping gold mining companies together works because they all share a common source of return in the gold price. (Gold mining companies profitability rises with the value of the gold they mine). Grouping biotech companies works because they are all bound up under the same regulations (FDA approvals, government healthcare spending, etc).
Statistically, if a sector/theme is real, you’d expect stocks within it to correlate with each other more closely than they do with share market as a whole. This is one thing index providers look at when sorting companies into sectors.
With a photonics index though I do have to wonder: what are these common sources of return? What holds this group of companies together? And how closely do these stocks really correlate?
Looking at the portfolio you have to wonder. Olympus, a Japanese company that sells endoscopes to hospitals and camera lenses is one of the top holdings. Gentex, which makes helmets for the US army and motorcyclists is in there. Luminar Technologies a 2020 SPAC which makes lidar for self-driving cars, just not Teslas (Elon Musk refuses to use Lidar). There doesn't seem to be an underlying economic theme uniting them.
Sure, you can group companies based on categories like this. In a similar way, I could make an acoustics ETF, or a scrabble ETF. But unless there is some underlying economic force driving the stocks to move as one it's hard to see coherent investment thesis.
General updates
- Vanguard is dominating iShares, with its ETFs collecting almost four-times the inflows of their counterparts from BlackRock, the FT reports. Larry Fink fired a whole bunch of ETF staff in 2018 after BlackRock’s share price fell. iShares market position has never really recovered, and Vanguard’s inflow lead is steadily growing.