How the 'Smart Home ETF’ Actively Tries to Balance Risks and Opportunities

In our last blog, Dasym CIO, Peter van Rooyen, explained the multi-layered thematic active investment approach that the Smart Home UCITS ETF (CAVE) deploys. This month I spoke with smart home fund manager, Seb de Feiter, to discuss the advantages of active management.

Actively Selecting Fitting Companies

Unlike most single themed ETFs that are passively managed and follow an index of companies associated with a certain industry (e.g. cybersecurity, AI), a complex theme like smart home requires active management.

Why? Because a multi-layered active approach ensures that CAVE can provide undiscovered upside by including less obvious beneficiaries of the smart home theme that could be part of another sector or industry. As discussed in the previous blog, the active manager (in this case Seb) can select the right names and adjust the ETF portfolio when necessary.

But active management has still more advantages, as Seb explained to me. It helps to better manage risks, an advantage in the current uncertain time. Based on new information or insights, he adjusts and balances exposure to themes, sectors, factors and stocks. That flexibility enables us to benefit from temporary over-reactions to good or bad news, and to quickly adjust if an idea does not work out or macro-economic circumstances change.

Benefitting From Opportunities

Active management also offers the opportunity to benefit from short-term market over-reactions. Since most smart home themes take a bit more time to materialize – especially in the case of the less obvious second and third order effects – CAVE often buys under-appreciated, or sells over-valued, stocks based on Seb’s thematic view.

AI is a good example. Several companies – including not only the magnificent seven (Apple, Microsoft, Nvidia, Amazon, Meta, Tesla, and Alphabet), but also network equipment company Arista – received a significant stock price boost from AI¹. The CAVE portfolio owned several of these stocks but reduced its holdings at high valuations, reinvesting in other – less obvious or maybe even counterintuitive – companies that will benefit from AI.

Last May, for example, the education sector was hit hard when ed-tech company Chegg (which offers a direct-to-student learning platform) reported that ChatGPT was affecting its subscriber numbers². Other education companies also felt the impact, even if their businesses were completely different, creating buying opportunities. Seb mentions PowerSchool,³ which provides business software running core applications for educational institutions. We recently increased CAVE’s stake in this company since it actually benefits from AI, using it for example, both to identify students who need support and to develop personalized learning solutions. Obviously it is uncertain if the expected benefit will materialize. We may reduce CAVE’s exposure to this company in the future.

Another example is found in music, where music stocks fell back last April when an illegal AI-generated imitation of Drake and the Weeknd went viral before streaming services took the fake down.⁴ As described in the Music Everywhere blog last June, we believe that AI is actually an opportunity for the music industry to improve quality, create new music experiences and increases the value of music made by real artists. This view drove our decision to increase the stake in Universal Music.

At the same time, investors must consider the related risks when investing in CAVE, such as market risk, sector concentration risk and risk of new technologies.

Managing Risks and Rewards

Turning to risk more specifically, Seb uses the shopping theme as an example, which is based on people buying more online. Nevertheless, the uncertainty surrounding consumer financial health is leading to challenging conditions for some ecommerce names. To balance that risk, Seb and his team take into account the whole value chain to lower the risk and still have exposure to the theme.

How does that work out? Well, CAVE still has retailers such as Lululemon in portfolio, but also includes payment companies like Visa, logistics companies such as Inpost and DHL, and companies providing warehouse solutions like Gxo Logistics or Terreno Realty.

Moreover, aside from changing exposure within the theme, Seb mentions that they also shifted exposure to other themes. While CAVE still has shopping companies in its portfolio, we have included more healthcare companies (see also our previous blog on this theme), since health is less reliant on the economic cycle.

Balanced Exposure to Secular Trends

By managing risks and opportunities, CAVE aims to create an attractive long-term investment proposition. Balancing the weights of different themes, sectors and factors diversifies exposure to a multitude of secular trends. At the same time, that balancing game reduces risk, improving CAVE’s risk-return profile.