These ETFs Are Rich in Leafy Greens

If you followed the exchange-traded fund landscape through 2021, you will know that innovation has been a key theme running through product development circles. While there has been a huge amount of focus on a single firm, there have been some interesting funds launched -- and not just under the broad umbrella of "innovation." In this article, I'm going to take a look at two funds launched in the last quarter of 2021 that focus on agriculture technology and plant-based foods.

These two are not branded as "ESG" -- environmental, social and corporate governance investing-focused funds, but both funds are positioned well within the "Doing well by doing good" category of investment products. Indeed, both were probably inspired by the U.K.-listed Rize Sustainable Future of Food ETF (FOOD-LSE), which has been gathering both awards and assets ever since its launch. This fund started in August 2020 and is registered as an "Article 9" fund, which have either supporting a sustainable investment or cutting carbon emissions as its objective. Article 9 is sometimes referred to as a "Dark Green" investing, as it goes a step further than "Article 8," which relies on some basic component screening, but does not require the strategy to actively promote or directly support sustainability. I'll talk more about SFDR, the UN Global Compact, and their influence on U.S. ETF product development in an upcoming article.

Green and YUMY

The VanEck Future of Food (YUMY)  was launched Nov. 30, 2020, and is an actively managed strategy, so there's no index to dissect. That said, per the summary prospectus, Van Eck outlines the scope of the strategy as focusing on companies that they classify as food technology, precision agriculture, and agricultural sustainability companies. The fund has an expense ratio of 69-basis points, meaning that if you invested $1,000 in the fund over a year, you would be paying $6.90 in fees.

The term "Food Technology" company paints a fairly broad landscape and includes companies that are involved in using innovative science to create, produce, package or distribute environmentally sustainable food products. Precision agriculture companies focus on optimizing farm operations, including with robotics and automation, irrigation equipment, and data management products and services. Agricultural sustainability researches, develops, produces or distributes environmentally sustainable products, such as new seed genetics, environmentally sustainable fertilizers or other crop chemicals, innovative animal feed and nutrition, and sustainable crop preservation and storage alternatives.

Looking through the current portfolio, I see a number of familiar names in the sustainable food space like Deere & Company (DE) , Beyond Meat (BYND) , and Oatly (OTLY) as well as companies like International Flavors & Fragrances (IFF) and AppHarvest (APPH) . Names that I'm not sure fall into what I would consider sustainable include Maple Leaf Foods (MFI-CA), Tyson Foods (TSN) , and Conagra Brands (CAG) . As with other fund commentaries, I'm not saying that these are bad investments or that they aren't executing on plans to become more sustainable but from a revenue exposure perspective, they are a good distance away from the 75% exposure I'd like to see in a targeted product like this. The only name that bowled me over when I saw it was Nestle S.A. (NESN-CH / NSRGY-US). As of the end of 2020, Nestle has been among the world's biggest plastic polluters for the third year running. Results for 2021 have been released and once again they have made the Top 10. Surprisingly, Danone (BN-FR /DANOY-US) is on the list as well. While YUMY does not list itself as a by-the-letter ESG fund, I would think leading with "Sustainability" would lead portfolio managers to reconsider names like this.

Watch EATV

The 75-basis point VegTech Plant-based Innovation & Climate ETF (EATV)  started trading Dec. 28 and is also an actively managed portfolio. The fund seeks to provide exposure to plant-based food and materials focused businesses that it determines to be "VegTech" companies. The fund lists several target areas including plant-based food and ingredient companies, plant-based materials companies including cosmetics manufacturers, vertical farming companies, and from what I can tell, 3-D printed meat focused companies.

In reviewing the fund's current holdings, I see a few familiar names here too, like Burcon Nutrascience Corp (BU-CA), Very Good Food Company (VERY-CA), and Mission Produce (AVO) . I also see Anheuser Busch InBev (BUD) , which at first blush seemed odd, but the company did back a new company in January 2021 (Evergrain) which looks to further process brewing byproducts into other consumable products like protein shakes and bars, breads and barley-based milk. This is an interesting and innovative venture, but regular readers know I'm not crazy about picking up a name just to get exposure to a tiny slice of revenue. The one thing I noticed was that about 24% of fund names have market caps below $100 million so this fund is focusing on the potentially "bleeding edge" of some of these technologies. As the fund is active, the portfolio managers will be able to size these positions appropriately as the fund scales so there shouldn't be too many liquidity concerns regarding these holdings.

One concern I did have was looking through the holdings and seeing both Tesla (TSLA)  and Fisker (FSR) . What do EV manufacturers have to do with veg tech? Then I remembered the "Climate" part of the fund name. Reading through the summary prospectus leads you to the section that talks about United Nations Sustainable Development Goals and the large part that livestock plays into greenhouse gas emissions. The issuer then morphs that conversation into a bullet point that qualifies a "company that sells a product that generates less greenhouse gas emissions than typical replacement products," which I guess is how we end up with these two names in the portfolio. Other qualifying criteria include a company signing a pledge to reduce greenhouse gas emissions (UN Climate Neutral Now, and Global Optimism Climate Pledge are offered as examples), a company disclosing "a commitment to reducing greenhouse gas emissions" or a company having lower emissions per unit of sale or assets than industry peers. This opens a pretty big door for all kinds of companies, but the issuer maintains their focus will continue to be on those names identified as VegTech.

The Harvest 

I am a fan of the direction both these funds are taking in focusing on this high growth part of what has traditionally been consumer staples. I have some reservations as to how each fund is executing on providing this exposure. Some readers may feel like I'm being too militant in my assessments, but I have been in enough meetings with institutional investors to understand that these nits that I am picking can make the difference between a product being selected for allocation or not. Beyond an issuer being able to deliver what they advertise; investors should be demanding products that truly deliver the kinds of exposures they want in their overall portfolio.

Stepping off my soapbox, so far this year it looks like EATV's (7.57% decline year to date) allocation to small cap high growth tech is doing more harm than good as compared to YUMY (-4.39% YTD). Currently, the broader Consumer Staples Select Sector SPDR ETF (XLP)  (-1.34% YTD) is outperforming both funds and the SPDR S&P 500 ETF Trust (SPY)  (-3.88%). While these funds are feeling some pain now, there may be an opportunity to take advantage of current pressures and find some good entry points or perhaps dollar-cost average your way into a position.

(DE is a holding in the Action Alerts PLUS. Want to get an alert when the portfolio makes a trade, click here.)

At the time of publication, Abssy had no position in any security mentioned.