FWD: A Promising Disruptor ETF (NYSEARCA:FWD)

It’s always a challenge for investors to identify emerging growth themes, as they are largely only known with hindsight. Having said that, one thing all megatrends have is they are largely focused around disruption through increased productivity and efficiency. This is largely why the Tech sector has been the darling of most portfolios. With increasing speed and large data, mega-cap companies can get increasingly fine-tuned on squeezing more from less through automation and information.

Given that it can be hard to spot those companies just on the edge of accelerating growth, it’s worth considering outsourcing the identification process through active ETFs that do that for you. That’s where the AB Disruptors ETF (NYSEARCA:FWD) comes into play. This fund provides exposure to innovative leaders who are likely to disrupt their respective industries and deliver outperformance relative to cap-weighted indices. This is an active fund that uses fundamental, bottom-up research to identify future disruptors across the globe.

But, does the fund deliver? After all, we all know active management, in general, doesn’t really outperform when it comes to stock picking. Is FWD an exception?

A Look At The Holdings

The ETF holds 80 to 100 individual positions. No position makes up more than 5.1%, and we can see from the top 10 holdings that the majority are in the tech space. And, of course, my favorite stock in the world, Nvidia, is at the top.

The key to remember here is that this is an active fund. That means, for all we know, the top 10 positions could look completely different in a few weeks from now. This isn’t necessarily a bad thing if those companies are being replaced by high performing new disruptors, but it makes any conclusions on the portfolio based on the top holdings hard to have confidence in.

Sector Composition and Weightings

When we look at the sector composition, we find that nearly half of the portfolio is in Tech, with Health Care and Industrials a distant 2nd and 3rd respectively. No Utilities, Materials, or Energy exposure to speak of given their minimal weightings.

I noted before, this fund is global. The majority though remains US, with it making up 74% of the fund. While I find it hard to believe there aren’t plenty of international companies that could be considered disruptors in their sectors, the reality is any fund that has a heavy tech exposure will almost automatically be US dominant.

Peer Comparison

Two funds worth comparing the AB Disruptors ETF to are the ARK Innovation ETF (ARKK) and the Global X Robotics & Artificial Intelligence ETF (BOTZ). While ARK Innovation ETF is run by ARK Invest and shares a focus on disruptive innovation, its mandate is much broader and includes genomics, fintech and autonomous technology. The Global X Robotics Artificial Intelligence ETF has a focused mandate on robotics and AI – but is not exclusively concentrated on the rapid adoption phase of the S-curve, like the AB Disruptors ETF. It is this thematic proposition that differentiates the AB Disruptors ETF from other sectoral or thematic funds.

When we look at the performance of the three funds to each other, FWD wins out. It wouldn’t be fair to attribute this solely to the Nvidia position, but clearly that has helped, given ARK didn’t allocate there throughout this fun.

Pros and Cons

On the positive side, FWD provides investors with exposure to a collection of innovation-focused companies. The thematic overlay ensures that the portfolio is strategically placed to benefit from secular growth trends such as cloud infrastructure, AI, digital payments, medical innovation, and so on. And there is plenty of research to suggest that thematic investment indeed generates superior long-term returns relative to a more standard sector framework. Moreover, the active management approach addresses certain drawbacks of thematic investing. So, if, for example, one of the thematic holdings experiences an extended period of underperformance, the ETF would dynamically adjust the portfolio’s exposure to capture new opportunities as they become available.

But you can land in trouble with the AB Disruptors ETF too because of its heavy sector allocation to Tech. And keep in mind that because the fund invests in emerging and fast-growing companies, it likely will be more sensitive to swings in markets and uncertain macro backdrops.

Conclusion

I think this is a decent fund overall. FWD allows investors who wish to access innovative companies that might benefit from secular growth trends an easy way to do so. Just keep in mind that it’s still a relatively new fund (launched in March 2023) and we don’t know how the active management can help during a broad market correction. Still, I think it’s promising so far compared to other alternatives and worth considering.

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