Anyone who has experienced recent business culture has undoubtedly heard the phrase “let’s circle back.” Well, in this blog post, Drew Mauck and Spencer Doar are going to circle forward, discussing the circular economy and its emerging role in the world of ETFs.
If you are a fan of 3Points, you may have noticed that we’ve become very interested in a (seemingly) new economic model: the circular economy. While the circular economy concept as we know it began taking shape in the 1970s, it has only really picked up steam in recent years. And why do we say it has picked up steam? Well, there is now an ETF dedicated to the space, as well as investment funds specifically contributing capital to companies working to expand the circular economy.
The ETF from Direxion, dubbed “World Without Waste (WWOW),” tracks “the performance of 50 U.S.-listed companies that are representative of the transformative shift from the linear model of economy to a circular one… providing investors access to the shifting paradigm in growing segments such as biofuels, solar power, and waste management, along with collaboration and content sharing platforms.”
But before we get into the ETF, we will define the circular economy by its three — yes, that’s right, our favorite number — principles:
- To keep products in use (aka reuse)
- To regenerate natural systems
- To design waste out of production
If you’re curious to learn more about the circular economy and its potential to shape the future of business, check out some of our go-to circular economy resources: the Ellen MacArthur Foundation, GreenBiz, and our client, Rheaply (and the monthly circular economy newsletter on LinkedIn written by Rheaply’s CEO, Dr. Garry Cooper).
But back to capital markets and the ETF…
Given the increasing focus on environmental, social, and governance (ESG) factors in investing these past years alongside the rise of increasingly thematic ETFs, the intro of WWOW in December 2020 shouldn’t be a surprise. Consider that, by the end of March 2021, there were more than 750 ESG ETFs with more than $264 billion AUM, according to TrackInsight.
To be clear, WWOW is a minnow in this ocean of bigger ETF fish, with roughly $5.7 million in the fund, but its presence is a window into the opportunities and the problems faced by an investor seeking to harness trends aimed at building a better world.
Right off the bat, one issue is that some of the fund’s holdings aren’t at first blush very circular economy-esque. Spotify, Twitter, Netflix, Adobe, Facebook, Etsy, Snap, and Roku are 16% of the portfolio. There’s another roughly 10% chunk that’s pretty much just (used) car-related — Autodesk, Cars.com, CarGurus, Kar Auctions, and Vroom — which, sure, is fine, but given the fossil fuel considerations, seems slightly off. (Yeah, there is Tesla in it, too.) That’s now a quarter of the portfolio that doesn’t feel like it strikes at the heart of the issue. This isn’t to poke at Direxion — there are hurdles to what can be held given market constraints (size, liquidity, et al.). This issue isn’t unique to ETFs — it can be said for the whole green investing space (see the WSJ’s June 24 piece “Environmental Investing Frenzy Stretches Meaning of ‘Green’”).
This securities profile is a byproduct of the index methodology that harnesses five sub-themes essential to the circular economy, one of which, alluded to above, is “collaboration and content sharing platforms.” If a company makes more than 50% of its revenue from collaboration and content sharing stuff, they’re eligible for inclusion.
WWOW isn’t the only ETF with this issue. For example, when ARK Invest debuted its ARK Space Exploration & Innovation ETF, it was pilloried for some of its holdings like Deere, JD.com and, perhaps most alarmingly, ARK’s own 3D printing ETF. Sometimes it feels like a fund just has to flesh out the portfolio with something, even if it’s a stretch.
As a Chicago firm that acknowledges the market innovations of our windy city — be it Milton Friedman at the University of Chicago or the risk managers who made rowdy derivatives exchanges famous — we’re enthralled by the possibilities of new market opportunities, but when it comes to ETFs, like any investment, know what you’re actually holding and the risks!
Regardless of whether WWOW gathers the AUM to be successful, there is one thing 3Points will put its money behind: the circular economy will be in the common parlance within five years.
Do you know of any companies that are moving and shaking in the circular economy? If so, we’d love to hear about the endeavor. As we say: ABL!