Thematic Trading Fractional (TTF): a New Approach to Thematic Investment

Written by 
Mike Stukalo
/
August 1, 2022

Answer: Samsung

Hover your cursor over the buildings and look at the connections between the companies
⬇️

While working in various positions in private equity, VC, and finally as a quant at Fidelity Investments, I had a front-row seat to the development of investment products for retail investors. It became clear that young passionate investors are looking for tools to simplify their decision-making while keeping their market positions active.

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Old asset management firms do their best to innovate and attract a younger audience, but often fail to do so. I stay convinced that truly user-friendly investment solutions can come only from fintech startups that are not afraid of trying new things, speak the language of Millennials and Gen Z, share their values, and can innovate faster and be bolder than the mastodons of the financial services market.

At Gainy, our mission is to simplify complex financial decisions by providing easy-to-understand financial tools, tailored financial advice, and keeping the investment process active, fun, and meaningful. The founding team of Gainy is young (with me being the eldest), extremely professional, and passionate about what we do. We are building a product that we would love to use, and therefore know that thousands if not millions of retail investors will love using it too.

Let me tell you the origin story of TTFs… 

A Bus, a Motorcycle, and a Tesla

tesla investing good idea development

Traditionally, when people (and especially those in academia) think about various investment philosophies, they talk about passive vs active investments. Passive investments do not aim to beat the market, but rather promise to follow it closely. With the rise of ETFs retail investors could buy the whole S&P 500 index (SPY), the NASDAQ index (QQQ) if they feel techy, or Russell 3000 Index (IWV) if they want to really spread the money around.

The key idea here is if you cannot beat an index, invest in it directly and do not touch your investments for a long-long time. The same philosophy is implied in many robo-advisor products – they put you in a model portfolio consisting of several ETFs and mutual funds, and will rebalance them for you. Your job is to relax and enjoy the ride.

When we were talking to potential investors in Gainy, the analogy I liked to use was the following: imagine, you want to get from point A to point B in your commute (and in your financial journey). You can take a bus. It is easy, convenient and you will get there sometime. But let’s face it — it’s boring, you have no control over where the bus goes, and you will take a lot of streets and stops that you did not care to take. This is a passive investment for you. 

Now, you can buy yourself a sports motorcycle — a lot of fun, you can split the lanes and get to point B really fast. Although the chances that you will not get there at all are high, as you may crash halfway. In your investment journey, these are active products that incentivize you to be excessively risky: day trading tools, derivatives, margin trading, short-selling — all of them bring good money to brokers but set inexperienced investors up for a disaster.

After conducting hours upon hours of interviews with our current and potential users, and carefully examining third-party research, we gathered some insights that call for a different solution which, to continue with the analogy, is safer than the motorcycle but more fun than taking a bus. The key insights we got are the following. The new breed of clients coming to neobrokers are investors, not traders. They consider their investment portfolio as an alternative to savings accounts — a way to save money for large purchases, education for themselves and their kids, and for a comfortable retirement, preferably an early one. 

They want to manage their investments actively while lacking the time and knowledge to embark on rigorous research. Most importantly, they often think in terms of investment topics rather than single-stock picking. They also feel passionate about many things in life and are willing to invest in companies that share their values.

This is exactly the investment product we are building at Gainy. To return to the vehicle analogy, we want to build a Tesla autopilot. We help our users to identify groups of companies linked by the same topic or cause and highlight the criteria that make them fit the client’s interests and risk profiles. Moreover, if the user does not have the time to steer her portfolio actively, we will make these investments for her, rebalance the portfolio as needed, and keep it up-to-date with the chosen topics (hence the autopilot). However, at all times the investor can take over the controls and change the investment themes to reflect her changing views on more prospective or worthwhile topics to invest in.

What is a TTF?

TTF stands for Thematic Trading Fractionals. Yes, I know it’s a mouthful so in the spirit of Gainy’s philosophy we will keep it simple and refer to the product by its abbreviation. In essence, TTF is a collection of securities that are linked by a common theme. These collections are curated by Gainy and optimized to better reflect the chosen theme and deliver diversification benefits.

The themes for TTFs can be as simple as industry classifications (e.g. Green Energy TTF), a certain investment approach (Dividend TTF), or some social cause (Diversity Leaders TTF). Furthermore, we strive to create a large range of TTFs to reflect a wide variety of topics, and we keep our eyes wide open for new themes and topics that are getting some traction among retail investors.

When an investor signs up for the Gainy app (available in the AppStore), they go through a simple but insightful questionnaire that helps us to find stocks and TTFs that he or she might like based on their interests and risk profile.

What is more important is that TTFs are not just a list of names. We give our users in-depth analytics of each company included in the TTF and the suggested weights of these companies in the thematic portfolio. Currently, we are working on implementing trading capabilities, where investors will have an option to buy the TTF as a whole, and we will maintain and rebalance it for a small fee.

What’s wrong with ETFs?

An experienced investor may ask, ‘Why can’t the same be achieved by buying a thematic ETF?’  Great question! Let me start answering it with a brief history of ETF origins. The first ETF launched in the U.S. was SPDR's SPY, which aims to replicate the return of the S&P 500 Index. Back then, ETFs were a breakthrough that gave investors an opportunity to have long positions in stocks comprising the index without buying these stocks.

The key premise was that if the investor wants to buy every stock in S&P 500 proportionally to their weight in the index, his name better be Bill Gates. After all, some of the stocks can be worth hundreds if not thousands of dollars. If the investor has just a couple of thousand to invest, what is he going to do? Buy half a share, haha? Twenty years ago, this joke could be funny, but now many brokerage firms offer fractional shares when the client can buy not just a half, but 0.00001th of a share if they wish. With the introduction of fractional shares, one of the main value propositions of ETFs ceased to sound so attractive.

Now to thematic ETFs. There is nothing wrong with them if you want to get exposure to, let’s say, a whole industry. In this case buying, for example, a Financial Sector ETF (XLF) makes a lot of sense. However, by design and due to regulations ETF holdings consist of dozens and sometimes hundreds of stocks. Great for diversification, bad for expressing a focused investment theme. Moreover, the choice of stocks and their weights are beyond investors' control. We are back to our buy-and-forget approach.

With TTFs you get a focused portfolio consisting of a handful of stocks, typically between 10 and 20. You get all the data in a simple form to help you make an educated decision. However, at the end of the day, it is your call what stocks to include in the TTF.

Two business models: DIY and Autopilot

DIY ideas autopilot how does it work

As you might have guessed by this point, we at Gainy are all about giving our clients flexibility in their investment decisions while making their life easier. Therefore, we are implementing two different business models that cater to different types of investors.

We start with a subscription model that gives our users data and confidence to use our TTFs in DIY form. By subscribing to our platform, investors may see dozens of TTFs with respective portfolio weights, the match score that shows how well each TTF and stock reflects her investment interests and risk profiles, and get access to the fundamental data in an easy-to-consume format to create this TTF herself using whatever broker she is using already as long as the broker offers fractional shares. As an extra feature, we are working with some influencers (let their names be a secret to make it a surprise) to bring you TTFs created in collaboration with people you trust and respect.

For those who would rather just choose the topics and let us do all the dirty work, we are creating another model that will be a true autopilot. For a small fee similar to one you would pay to an investment adviser, which we are, we will create TTFs right on your account and maintain them for you. Moreover, each TTF can be tailored to your needs and you choose what stocks to exclude from the collection if you don’t feel like owning them for some reason. At every step of the journey, the final decision is yours. After all, it’s your hard-earned money we are talking about.

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