Mike Venuto, pictured, CIO of Toroso Investments and co-founder of the TETF index which mirrors the ETF industry, reports that TETF’s underlying index doubled in the past 12 months and achieved a return of 9 per cent YTD.
The firm comments that this is outperformance far beyond the S&P Financial Select Sector Index, which is currently in negative territory.
Venuto comments on the resignation of Howard Shultz as Executive Chairman of Starbucks (SBUX), and its possible effect on ETFs.
He writes: “At Toroso, through ETFs, we celebrate innovative thinking, entrepreneurship, and embrace business disruption. Without getting into politics, we appreciate Mr. Shultz’s decision although it comes at an awkward time for Starbucks shareholders. Starbuck’s just announced that it would be closing 150 stores and same store sales targets are now expected to grow by only 1 per cent.”
Venuto comments that two hundred ETFs own about 5.47 per cent Starbucks, which is not meaningfully close to the average of 7.5 per cent.
Venuto writes: “Moreover, as a tribute to the house that Shultz built, we note that this stock is overweighted in 10 ETFs (range 3.75 per cent to 2.27 per cent). Additionally, while heavily owned by passive rules-based ETF strategies, the principles that Shultz represents are reflected by the ownership by ETFs that follow factors such as Quality and Growth.
“Noteworthy is the fact that Starbucks ownership is also concentrated in the consumer discretionary segment and divided between US large cap and International ETFs. While the recent news proved disappointing, it will be interesting to see how all these numbers change after the next rebalance. “Starbucks, despite decelerating growth, both raised its dividend 20 per cent and positioned its buyback more aggressively in tandem with the news. Objectively – we would expect less growth should change SBUX qualifications in a few of these ETFs and will test what is meant by quality in a number of these ETFs. A 20 per cent dividend increase by a Company with a solid balance sheet whose growth is slowing may not meet every ETF’s definition of ‘Quality’. The great thing about a passive rules-based-structure is it follows a disciplined strategy with human subjectivity. Result: caffeine and taste do not matter!
“The future direction of SBUX stock is precarious right now, but as a credit to Howard Shultz, we thought we would review how the Company is defined by its ownership by certain ETFs. As an example, the Starbuck brand is owned by ETFs that look for leading businesses whose products are defined by their reputation, ie. VanEck Morningstar Wide Moat ETF (MOAT), Brandometry’s (BVAL) and Exponentials (ACSI).
“We could also highlight that millennials (MILN) love the brand and Shultz’s social mission, and this ETF therefore not coincidentally owns an overweighted position in SBUX. Make no mistake about it, Shultz’s social mission is also reflected in other social mission ETFs.
“SBUX is owned by the Insight Shares Patriotic Employer ETF (HONR) and many ESG and Impact investing ETFs, including the iShares MSCI KLD Social 400 (DSI) ETF. Mr. Shultz, as a pioneer for social change, has taught us a lot over the years including that doing the right thing can be accretive to economic value.
“Most definitely, fixed income investors should be watching closely. Howard Shultz has expressed great concern about the USD400 billion in interest required to maintain the country’s USD21 trillion in debt as well as the fact that 45 per cent of Americans have not saved USD400 for a rainy day. To that point, we think ETF investors will be looking beyond the 60/40 type of allocation and look closely at the alternative space.
“A fund like Eventshares U.S. Alpha Policy ETF (PLCY) offers an opportunity to capitalise on policy change. This fund is actively managed and holds long and short positions in about 50 to 100 companies that have exposure to US government policy and regulation themes identified by the fund’s active manager.”
