Issuer Subversive ETFs began 2022 with the launch of its metaverse play, the Subversive Metaverse ETF (PUNK) . It is closing out the year with the launch of three funds that seem to be more grounded in the analog world, so let's take look at what they're all about.
The first two, launched on Dec. 22, are the Subversive Decarbonization ETF (DKRB) and the strong ticker game Subversive Food Security ETF (KCAL) . Both funds sport 75-basis-point expense ratios, meaning $1,000 invested over a calendar year would result in a shareholder paying $7.50 in fees over that period. The last fund launched just a day later, the Subversive Mental Health ETF (SANE) , sports an even stronger ticker game than KCAL and carries the same expense ratio.
All funds are actively managed and are equity-based, including U.S.-listed common stocks, American Depository Receipts (ADRs) and developed and emerging markets equities. In addition, the issuer said DKRB can provide exposure to "water and carbon credits and futures contracts linked to longer-term appreciation of Decarbonization Companies." I'm not sure what that last sentence means, but from a quick review of current fund holdings it looks like the portfolio manager is sticking to equities for now, although I was interested to see a few Over-The-Counter names in the mix, such as Glencore PLC (GLNCY) and Umicore Group (UMICY) . The issuer said KCAL also has the ability to provide exposure to "futures contracts on food and fertilizer," but similarly has yet to venture into those markets.
Deconstructing DKRB
Decarbonization has been a popular focus over the past few years, and of all the environmental, social and governance (ESG) mandates seems to be the one that has the most traction. Given the crackdown of sorts by the Securities and Exchange Commission earlier this year about ESG-focused strategy labeling, I was relieved to not see this fund promoted as yet another "ESG solution."
Overall, the prospectus lays out a straightforward approach to selecting names for its universe and, interestingly, focuses on a 50% minimum of assets and/or capital expenditures to gauge exposure to decarbonization efforts as opposed to revenue or profits. Further, the strategy spells out that it is not strictly "zero carbon" but more of a "who and what is helping us to reduce our dependency on fossil fuels" approach. Because of this, there will likely be some exposure to natural gas and even some exposure to oil directly. From the prospectus: "Decarbonization Companies are generally expected to consist of companies dedicated to battery technology, companies involved in the production, distribution, and delivery of water and carbon, and companies involved in the infrastructure that supports decarbonization efforts (for example, nuclear technology), as well as the infrastructure that supports wind and solar networks." Materials companies are also included in this definition.
Chewing on KCAL
While there are ETFs focusing on food and agriculture, this is the first I've seen taking an active approach. KCAL security screening also focuses on company assets and capex but expands qualifying criteria to revenue as well. From the fund prospectus: "Food Security Companies include companies involved in the support, maintenance, irrigation and processing of plant and animal foods. The Fund considers food security to be a global food supply chain that can reliably and predictably produce, distribute, and deliver food."
The fund does not take a hardline approach to what it considers food and best practices, and includes companies involved in meat production as well fertilizer/potash production. Basically, if you're looking for a fund stocked with the latest soy-based alternative foods, this is not it. The fund does consider water in this analysis, but the prospectus states it will limit exposure to water through investment in publicly traded desalination plants.
One other section in the prospectus I found interesting is that while most funds in this space are looking for long-term shifts in consumer behavior and spending, this strategy makes no bones that it "will seek to identify companies that are positioned to help the global economy manage the inflationary shocks resulting from the global pandemic response and the truly supply-driven food chain shocks that the Adviser believes will result in generally higher prices on food inputs and higher interest rates/weaker currency among those countries where, in the view of the Adviser, the risk of interruptions in the global food supply chain are highest." It's a bit of a mouthful but a clear indication that its active approach will be both strategic and tactical.
Examining SANE
Of the three, this one piqued my interest from the title, let alone the memorable ticker. We've seen some funds launch in the psychedelics space (and one close already), so I was curious to see what subversive's equity-based take on mental health would be.
Turning to the prospectus, Subversive provides this definition for its exposure target: "Mental Health Companies are companies that have at least 50% of assets or revenues tied to products and services used in the treatment, prevention, or diagnosis of long-term mental health disorders, including depression and Alzheimer's." The prospectus expands on this definition to include companies that have exposure to fitness, sleep and nutritional product or services, and general exposure to metabolic health. Other qualifying exposures include solutions to addressing depression and pain management.
If this sounds like a lot, it is, and the portfolio reflects it. Not in the number of names but the names themselves. Sage Therapeutics (SAGE) , Supernus Pharmaceuticals (SUPN) , Jazz Pharmaceuticals (JAZZ) and Denmark-based H. Lundbeck A/S (HLBBF) fall squarely into the core definition of the target exposure. The rest of the fund seems to have more in common with the Healthcare Select Sector SPDR Fund (XLV) as 11 of SANE's 28 holdings are also found in XLV, among them Merck & Co (MRK) , Eli Lilly (LLY) , Bristol-Myers Squibb (BMY) and Pfizer (PFE) . As I've said before, it's not that these names are bad investments, but I just don't see a strong connection with the core positioning of this fund.
One thing that struck me as odd was the inclusion of oil field services name Nov Inc. (NOV) as the third- largest position. I wasn't sure if it was a case of a foreign local ticker mistakenly presented as a US local ticker, but the CUSIP identifier that shows on the website is for the US company. There is NVO, which makes more sense. (NVO) is the ticker for the US-listed American Depository Receipt (ADR) for Novo Nordisk A/S, a Denmark-based pharma company. My hope is that the position is actually in NVO and that the NOV ticker on the website is just a marketing oversight. I'll keep an eye on the website to see if this changes.
Wrapping it up
While Subversive took some lumps this past year with its first metaverse-focused fund, I like its persistence in the ETF space. As I mentioned, none of these funds breaks any new ground from an exposure perspective, but in this new age of ETFs utilizing active portfolio management, the proof will be in the pudding.
Also, investors will need to dig a little deeper to better understand what the portfolio manager is doing. The good news here is that this is where the transparency of ETFs puts investors in a much better position, with daily portfolio updates as compared to the quarter-end plus 45 days reporting requirement for mutual funds. Given the newness of these funds, I'm not sure I can make any recommendations right now, but these are definitely going on the watchlist.
