Innovation Shares has launched two global thematic ETFs KOIN which invests in stocks with exposure to blockchain technology and EKAR, the NextGen Vehicles and Technology ETF.
Innovation Shares’ Managing Director Matt Markiewicz worked at iShares for six and a half years and helped build the firm in the summer of last year. The firm has USD8 million under management.
EKAR’s underlying index is constructed utilising a natural language processing algorithm that screens for global stocks that have exposure to the theme of electric and self-driving/autonomous vehicles. This approach, developed by the Innovation Shares team, is patent-pending and global in scope.
Markiewicz says: “Any investor can buy our ETFs. They are a completely democratised investment vehicle.”
The different approach at Innovation comes from the use of artificial intelligence in building their indexes. “We have a patent pending in the US for our index methodology whereby we use a natural language processing algorithm that identifies securities for particular themes,” Markiewicz explains.
“One of the challenges about building a thematic portfolio is that thematics’ span sectors and borders and traditional Wall Street sell side research is silo’d by sector and geography so a US retail analyst doesn’t cover European retail stocks or the UK analyst doesn’t cover continental Europe.
“In order to build a global thematic portfolio, traditionally, you needed a team of analysts dedicated to trying to find commonality to sectors and regions and that is an expensive process,” Markiewicz says.
“So we use textual analysis which is a cost efficient way to identify stocks that are related to a particular theme given certain key words.”
Through the use of textual analysis, the algorithm reads 10s of thousands of media articles and uncovers stocks relating to the theme, given certain key words.
“It follows media articles because a lot of times the media is talking about themes while analysts concentrate on sectors and regions.”
This technology comes from the hedge fund world according to Markiewicz. “Hedge funds have been using this technology for the past seven to 10 years to trade on, but these are investment themes and meant to be invested in not necessarily traded.”
Innovation Shares has created its own indices for the two next generation ETFs.
“We felt there was a void in the marketplace for these two exciting global themes of blockchain and next generation vehicles,” Markiewicz says. Related to EKAR: “There is a massive investment merit to both of these sub-themes and the internal combustion engine is gradually being replaced by cars run by electric batteries.
“As auto manufacturers are ramping up production of electric vehicles, autonomous vehicles are gaining traction in the US, with California just passing a bill allowing the testing of fully driverless vehicles.”
Another trend in the sector is shared mobility with the rise of firms like Uber.
“You are getting massive tailwinds from an environmental standpoint as countries that have agreed to lower their emission standards – this is one of the ways they will get there.”
Markiewicz believes that, initially, Innovation Shares’ two ETFs will be most appealing to the retail investor but predicts they will grow and attract institutional support.
“Every ESG investor has a different definition but there is a good chance it could meet an SRI hurdle for sure. The autonomous vehicles and passenger economy is projected to generate USD48 trillion in global service revenues by 2050.”