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PureFunds introduces new big data-focused ETF, tracking the ISE big data index. A deeper look at the index reveals social media networks, credit data providers, and Internet companies in the ETFs’ top holdings. Investors should look under the hood of non-trivial sector-focused ETFs. ETF provider PureFunds is a relatively new player in the ETF market, competing fiercely with financial giants that dominate the ETF market, like Vanguard, Blackrock’s (NYSE: BLK ) iShares, State Street’s (NYSE: STT ) SPDR, etc. PureFunds is familiar to most investors as the provider of the Cyber Security ETF (NYSEARCA: HACK ) that was launched in November 2014, which attempts to provide a passive investment vehicle into the emerging cybersecurity market. Since its inception, HACK yielded a 10% return, providing a modest return for the $1.1B in net assets that were invested in the ETF. As shown in Chart 1 below, HACK’s return is much lower than the leading cyber security stocks, but it also offers a passive investment vehicle into the industry that allows investors to invest in this emerging industry without cherry-picking particular stocks. Since PureFunds introduced the HACK ETF, the firm released three more ETFs: the PureFunds ISE Junior Silver ETF (NYSEARCA: SILJ ), the PureFunds ISE Mobile Payments ETF ( IPAY ), and the PureFunds ISE Big Data ETF ( BDAT ). As a strong believer in the growth potential of the big data industry and its leading players, I cover many big data topics, both in Seeking Alpha and in my firm, from industry trends through earnings reviews to extensive long/short investment thesis and ad-hoc analyses. There are so many public companies involved in the big data industry including analytics, visualization, Hadoop integration, and IaaS/PaaS services that I was pretty excited when I first heard of Purefunds Big Data ETF. However, as the title implies, I was very disappointed by the outcome. The general idea of Purefunds to launch investment vehicles that invest in emerging sectors, such as big data, mobile payments, and cyber security, is great, and I think there is a demand for such vehicles. However, an ETF is a passive investment tool that tracks a third party index – in BDAT’s case, it is the ISE Big Data™ Index. Looking at the component eligibility requirements in the index methodology guide unveils a wider definition of a big data company as shown in the excerpt below. According to the document, there are two types of companies that are entitled to join the index: either a big data product developer/service provider or a company that aggregates massive data sets. While the first part makes sense-this is a big-data index and should include big-data companies-the second part (bullet ii above) basically paves the way for any large Internet company to join the index, whether it has some connection to the big-data market or not. Let’s look at ETF’s top 10 holdings, as presented below in an excerpt from the fact sheet, and see how many big-data companies are there. Out of the top 10 holdings, five companies have very weak links to the big-data industry and are included in the ETF just because of bullet point ii above-Facebook (NASDAQ: FB ), Twitter (NYSE: TWTR ), Thomson Reuters (NYSE: TRI ), Nielsen (NYSE: NLSN ), and Yahoo (NASDAQ: YHOO )-while the other five have stronger links to big data, but it is absolutely not their core business nor the main impact on their financials. Going down the list of holdings (31 in total) will also reveal LinkedIn (NYSE: LNKD ) and Dun & Bradstreet (NYSE: DNB ), which also have a weak link to the big-data industry. I agree that it might be difficult to find 30 companies that are big data focused, but if the criteria are widened, I believe Amazon (NASDAQ: AMZN ), Rackspace (NYSE: RAX ), and EMC (NYSE: EMC ) will be found to have more to do with big data than the social media companies introduced in the index and ETF. In my opinion, this is a big deal. A big data ETF should include big data pure-play companies or companies that directly relate to that industry; having Facebook and Twitter in the top 10 holdings is missing the point. If ISE and PureFunds couldn’t find enough suitable companies to be included in the big data ETF, I would have suggested for them to include prominent SaaS, IaaS, and PaaS providers, rather than social media networks and credit/business data providers, as they have stronger links to the industry and are strongly impacted by it. For now, as BDAT does not provide pure big data exposure, I suggest investors to avoid using this ETF as an investment vehicle into the big data industry. Once PureFunds/ ISE have adjusted their ETF holdings/Index criteria, I will revise the avoid recommendation above, and if another big data ETF is introduced, I will perform the same due diligence again. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer’s opinion about the companies mentioned in the article. Investors should conduct their due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing. Scalper1 News
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