2023-08-18 15:48:46 ET
Summary
- KOMP provides an attractive opportunity to participate in the development of innovative areas in the economy, which are almost always in the focus.
- The composition of the fund’s portfolio has changed since the beginning of the year, providing exposure to mining and crypto areas.
- I estimated up to 20% upside potential for the KOMP ETF, which could come with higher volatility though.
SPDR S&P Kensho New Economies Composite ETF ( KOMP ) is lagging behind the broad benchmark in terms of performance, which is related to the fact that the technology sector, which pulled the market up, does not have as much weight in the fund. Nonetheless, I believe that KOMP has a decent 20% upside potential that could come from the rapid development and gradual implementation of innovative technologies to other sectors. I uphold my previous thesis on KOMP that it's reasonable to participate in the growth of new industries and innovative technologies through investment in the fund. Meanwhile, the composition of the fund's portfolio leaders has changed since the beginning of the year to mining and crypto players, which could add some volatility to the performance. However, the fund has a unique methodology for selection, which provides a high diversification and more even exposure across the spectrum of capitalization and all sectors of the economy.
Fund's overview and performance
KOMP is an effective tool to catch the development of current breakthrough technologies, which are an integral part of the fourth industrial revolution. The ETF provides an attractive opportunity to invest in innovative areas with substantial long-term prospects and benefit from the rapid growth of the "new economies". I will recap some lines from my previous article:
KOMP is established to mirror the performance of the S&P Kensho New Economies Composite Index, which covers more than 20 areas of the new economy, such as AI, robotics, automation, VR and AR, nanotechnology, 3D printing, blockchain, etc.
The funds benchmark employs a unique methodology of selection of issuers to be included in the index. The selection is not based on quantitative criteria, instead, the power of AI and Natural Language Processing ("NLP") are used to scan the regulatory filings, searching for key innovative terms and words relevant to the respective new economy sectors. Out of the selected candidates, 25 sub-indices are formed, which serve as a basis for the index. The risk/return ratio of each sub-index and the stage of the innovation life cycle are also taken into consideration.
The fund is highly diversified compared to industry-focused ETFs, and as of August 15, KOMP holds 545 positions in its $1.75 billion portfolio, where the top 10 holdings occupy 11.5%, while the top 50 accounts for 34.8%. The next advantage of the fund is a more or less even exposure across the market capitalization spectrum of the companies, as just 38% of the portfolio is invested in issuers worth more than $12.9 billion and 51% is dedicated to mid and small cap players.
Also, the composition of the fund overlaps just 23% with that of SPY, which represents a decrease compared to 29% estimated in my previous article. The same relates to the NASDAQ 100, where the similarities are only 8.5%, compared to 13%. As a result, KOMP provides additional access to innovative companies that are not included in the basic and sectoral indices. The next thing I like about KOMP is that the fund is searching for innovation in all sectors of the economy, not just limiting itself to the IT sector, but focusing on healthcare and industrial sectors as well.
Holdings breakdown (Seeking Alpha)
KOMP has been through some notable changes in the portfolio structure since the beginning of the year, which was marked by rapid development of AI. In particular, the focus shifted to blockchain and financial technologies, VR from environmental technologies, renewable energy, and nanotechnology. In the portfolio composition, the focus also shifted from software and electronic equipment and defense companies to mining and crypto-currencies-related likes of Coinbase (COIN), CleanSpark ( CLSK ), Marathon Digital ( MARA ), Hut 8 Mining ( HUT ) and Riot Platforms ( RIOT ).
It should be noted that the fund was allocating more than 1% for up to 3 positions previously, while now we see that the top 10 have such weights.
Looking at the performance, KOMP is clearly trending below the S&P 500 index, represented in the following chart by SPY, as the big techs do not have as much presence in the fund compared to SPY.
Overall, the technology sector is the second-biggest gainer since the beginning of the year with a 33.6% gain . However, I believe that in the longer term, more comprehensive exposure to innovative industries could lead to a decent upside against the backdrop of a secular shift to innovative technologies.
In the previous article, I mentioned that the rapid development of AI, cloud computing, big data analytics, IoT, robotics, and ML algorithms are becoming a foundation of future innovations. When it comes to the crypto market, the growth drivers are generally associated with concerns about the stability of the global banking system and the increase in money supply available to buy cryptocurrencies. Concerning the former, the worries about the scope and duration of the US banking crisis have not yet subsided after the collapse of several regional US banks, while the latter is connected with the increase of the US national debt threshold and economic stimulus measures. The prospects for the mining industry could be underpinned by institutional investors as well following the launch of the EDX Market crypto exchange. And last but not least, BlackRock's plan to launch a spot ETF could be the next catalyst for the market.
Valuation takeaways
I will turn again to the consensus estimate for the S&P 500 index in order to estimate the potential of KOMP. Currently, the median target price for the next 12 months stands at 5,106, which represents a 16% upside potential compared to the current value of the index at 4,404. Taking the same beta coefficient of 1.17x, which remained unchanged, the growth potential of the fund on the horizon of next 12 months could be estimated at 18.7%, which adds up to 20%, when including the annualized dividend yield.
As a result, I remain bullish on KOMP's prospects and a price of $49.4 per share seems to me justified. The addition of crypto/mining stocks could add some volatility. However, it shouldn't be much of a concern, as KOMP has a broad focus, which ensures diversification and balanced performance that could offset crypto volatility.
Risk factors
The main risks for the ETF still relate to high interest rates, increased volatility in the US market and concern about the onset of a recession. In addition, it should be noted that the risk/return profile of the fund's portfolio changed, and it's reasonable to expect somewhat more volatility following the addition of crypto stocks.
For further details see:
KOMP ETF: Innovations Are Always Tempting