Product news: Purpose gets tactical with thematic and one-ticket funds

Thematic funds offer the promise of capturing a trend and watching the outsize returns roll in. But choosing the right theme at the right time is difficult.

“Almost all of the money shows up so late,” said Craig Basinger, chief market strategist with Purpose Investments in Toronto. “We see that time and time again.”

And even when investors get in on a theme before it peaks, many hold on for too long, Basinger said, believing in a long-term trend such as electric vehicles without understanding how changing market dynamics affect the fund they hold.

Purpose introduced a fund last week that attempts to impose discipline on thematic selection. The Purpose Tactical Thematic Fund (Cboe Canada: RTT) begins with a universe of 16 thematic ETFs and uses the momentum factor to determine which ones to hold.

“I think we’ve come up with a way to inject an investment process into a part of the market that is lacking one,” Basinger said.

Thematic funds are notoriously volatile. A report from Purpose showed that among the 50 largest U.S.-listed thematic ETFs, the one-year price change as of Oct. 13 ranges from 47% to –32%. Many funds that do well one year see a reversal the next.

The new fund’s approach is similar to the $689-million Purpose Tactical Asset Allocation Fund (Cboe Canada: RTA), albeit with a narrower focus.

The new thematic fund’s process is triggered when the managers measure positive momentum in one of the underlying 16 ETFs, and a 20% position in that ETF is added to the fund. Once the fund is invested in five ETFs, it’s full and doesn’t add positions even if other ETFs in the universe demonstrate momentum. Basinger said Purpose chose the limit because it wanted to hold “meaningful positions.”

When one of those five positions rolls over into negative momentum — whether due to a legislative change, a shift in general risk appetite or another reason — the Purpose fund sells its entire 20% position. If there isn’t a replacement ETF in the universe showing positive momentum, that 20% position is split half and half between cash and an S&P 500 ETF.

At launch, the Purpose fund held only two underlying thematic ETFs — one focused on cybersecurity and one on gold — with 60% of the fund split between cash and the S&P 500.

Basinger said that position may seem unusual but it reflects the current environment as well as the nature of the fund. Because most thematic funds are speculative, there are times — such as in broader downturns — when the Purpose fund may not be invested in any of the underlying 16 ETFs, he said.

To diversify somewhat from typical tech themes such as AI, clean energy, biotechnology, electronic gaming and autonomous vehicles, Purpose included themes such as strategic minerals, infrastructure and gold in its 16 ETFs.

All of those underlying ETFs are U.S.-based. Basinger said that because the fund expects to average a trade per month or more, it made sense to use cheaper and more liquid U.S.-based ETFs.

The fund, which has a medium risk rating, comes in ETF and mutual fund series. The management fee for the ETF and Series F is 0.50%, while the Series A fee is 1.50%.

A different kind of asset allocation

Purpose also released new asset allocation funds that seek to address some of the pitfalls in 60/40 portfolios that came to the surface during last year’s market rout.

The three funds come in the standard conservative, balanced and growth packaging, but they have more room to manoeuvre, adjusting allocations based on the momentum and fundamental factors. They can also invest in alternative funds and use hedging and short-selling strategies.

Earlier this month, Horizons introduced asset allocation funds that use leverage and covered calls.

“Purpose believes the forward-looking investment climate features a very different set of challenges than the post-2008 bull market that tends to inform investor recency bias,” the firm said in a release.

The new funds are actively managed and hold a mix of both active and passive, third-party and proprietary funds (up to a maximum of 40% invested in Purpose funds, not including cash funds).

The Purpose Active Growth Fund (TSX: PAGF) has a baseline allocation of 81% equities, 17% fixed income and 2% cash, but the equity exposure may swing as low as 66% and as high as 96%, according to the prospectus.

The Purpose Active Balanced Fund’s (TSX: PABF) baseline allocation is 60/38/2, but the equity exposure may range from 45% to 75%. The Purpose Active Conservative Fund’s (TSX: PACF) baseline is 39/59/2, with equity exposure ranging from 29% to 49%.

At launch, the equity exposures for all three funds was at the low end of their respective ranges.

The management fee for the ETFs and Series F mutual fund is 0.20%, and 1.20% for Series A.

BMO looks to structure outcomes

BMO Global Asset Management launched seven new ETFs this month, including three structured-outcome products that aim to provide defined returns over a specific period.

The BMO Canadian Banks Accelerator ETF (Cboe Canada: ZEBA) and the BMO US Equity Accelerator Hedged to CAD ETF (Cboe Canada: ZUEA) aim to boost returns in slow-growth environments.

The two accelerator ETFs use options contracts to provide approximately two times price returns of their underlying indexes over a three-month outcome period. As a trade-off, the funds cap the upside investors can experience over the period — beginning at 6.6% for ZEBA and 7.0% for ZUEA. The first outcome period ends Dec. 31 and resets quarterly thereafter.

The BMO US Equity Buffer Hedged to CAD ETF – October (Cboe Canada: ZOCT) uses options contracts to provide exposure to the S&P 500 index with an upside cap of 10.5% while sheltering against losses up to 15%.

The fund — whose outcome period is one year, ending on Sept. 30, 2024 — is aimed at investors worried about large drawdowns in equities and less concerned about benefiting from big gains. If the index drops 20% during the outcome period, for example, the buffer absorbs most of the drop and the ETF will be down 5%. If it gains 15%, investors’ gains will be capped at 10.5%.

Earlier this year, FT Portfolios Canada Co. released a buffer ETF that invests in a basket of underlying target outcome ETFs.

The management fees for BMO’s three structured-outcome funds are 0.65%, and the risk ratings are medium.

Here’s a list of BMO’s other new ETFs:

• BMO Long Short Canadian Equity ETF (TSX: ZLSC)
• BMO Long Short US Equity ETF (TSX: ZLSU)
• BMO S&P/TSX 60 Index ETF (TSX: ZIU)
• BMO USD Cash Management ETF (TSX: ZUCM and TSX: ZUCM.U)

New seg funds

Empire Life launched two new growth-focused active segregated funds. The Empire Life Global Growth GIF is managed by Empire Life Investments Inc., and the underlying fund of Empire Life Canoe Global Equity GIF is managed by Canoe Financial.

Canada Life, meanwhile, is boosting its segregated fund shelf with sustainable portfolios and real assets. The firm said this week that it’s making five of the underlying funds from the Canada Life Sustainable Portfolios available as standalone segregated and mutual funds.

It’s also adding the Canada Life Diversified Real Assets Fund and the Canada Life Global Small-Mid Cap Growth Fund to its seg fund lineup. The real assets fund was introduced as a mutual fund earlier this year.