Exchange traded funds have proven to be extremely popular with investors. From broad based baskets like SPY and IWM to more focused thematic investments like WCLD (cloud computing) or MJ (cannabis).
The two main disadvantages of publicly traded ETFs are lack of flexibility and costs. One can use only baskets that are offered by an ETF provider, and once venturing away from the very large broad based ETF, annual management costs are often in the 50-100bp/yr range. The Finsera platform offers a friendly yet powerful toolset, the BasketBuilder, to build and analyze custom baskets with no need to pay any management fees.
These include:
- An intuitive and flexible interface for defining a desired basket
- A rich set of analytics to evaluate basket performance and risk
- Detailed reports of basket composition over time
The platform supports the following tasks with no need for any coding:
- Replicating publicly traded ETFs
- Modifying publicly traded ETFs per user specifications
- Defining and building custom baskets based on desired characteristics and exposures
As an example of the BasketBuilder capability, we will build a basket of cybersecurity companies. We will start with defining an investment universe composed of the union of several publicly traded cybersecurity ETFs.
Understandably, this has been a growth area and indeed we see that the number of companies focusing on cybersecurity has roughly doubled over the past 5 years.
Understandably, this has been a growth area and indeed we see that the number of companies focusing on cybersecurity has roughly doubled over the past 5 years.
With Universe defined we can easily build a basket that invests in the cybersecurity space. For that we need to define a few additional parameters:
- Weights – market cap, equal or custom
- Objective function
- Max number of assets (optional)
- Min holding (optional)
- Risk Model (optional)
Here we will use a simple cap-weighted basket:
Performance of this basket over the last 5 years is actually better than the publicly traded ETFs with significantly lower turnover (lower costs, taxes)
As you can see, with an intuitive web-based UI, one is able to quickly define a customized basket. In a later post, we will show how the BasketBuilder toolset can be used to construct much more elaborate baskets.
