ETF Strategy, Dec 28th, 2020 | By James Lord, CFA | Category: Latest news
Direxion has launched a US equity ETF providing exposure to companies that are aligned with the so-called ‘circular economy’.
The fund provides exposure to a diverse set of companies working to enhance economic sustainability.
The Direxion World Without Waste ETF (WWOW US) has listed on NYSE Arca and comes with an expense ratio of 0.50%.
A circular economy aims to keep resources in use for as long as possible, extracting the maximum value from them whilst in use, before recovering and regenerating products and materials at the end of each service life.
The system contrasts to the traditional linear economy where resources and products are disposed of once they have been used.
Methodology
The fund is linked to the Indxx US Circular Economy Index which selects its constituents from a universe of US-listed stocks, including American Depositary Receipts, of companies with market capitalizations greater than $500 million and average daily trading values above $2m.
The methodology assorts the circular economy theme into five sub-themes: ‘Sustainability of Resources’ which includes renewable energy providers; ‘Sharing Platforms’ which includes companies enabling greater utilization of products through shared access; ‘Resource Recovery’ which includes firms recovering resources and energy from disposed of products; ‘Product as a Service’ which includes companies offering product access and retained ownership to internalize the benefits of circular resource productivity; and ‘Life Cycle Extension’ which includes firms that extend the working lifecycle of products through repairing, upgrading, and reselling.
Companies that derive more than 50% of their revenue from a particular sub-theme, as defined by a list of FactSet industries mapped to that sub-theme, are considered to be ‘pure-play’ and are included in the selection list.
The largest 10 companies from each sub-theme are selected to form the final index. If there are fewer than 10 companies in a sub-theme, the methodology fills those spaces with the next-largest companies from the entire selection list.
Constituents are equally weighted, and the index is reconstituted and rebalanced annually in January.
Based on back-tested data, the strategy has performed exceptionally well since the index’s inception date in February 2016. As of 21 December 2020, the index has gained 378.3% compared to a return of 115.9% for the Indxx 500 Index which acts as a proxy for the S&P 500. The strategy has pulled away from the US large-cap market this year which is likely due to it having a larger weight in information technology stocks, as noted in the ETF’s prospectus.
Source: Indxx.
European investors interested in the circular economy theme may wish to consider the BNP Paribas Easy ECPI Circular Economy Leaders UCITS ETF (REUSE FP), which brought to market by BNP Paribas Asset Management in May 2019. REUSE tracks the ECPI Circular Economy Leaders Equity Index and currently houses €180m (approx. $220m) in assets under management.
