New Meet Kevin (YouTuber) ETF launched on the NYSE ARCA

How the MeetKevin ETF select stocks

PP is an actively managed ETF that focuses on investing in U.S. listed companies that in MeetKevin's view qualify as an "innovative company" with "pricing power". According to MeetKevin, this is defined by a company's price elasticity. 

According to its prospectus, PP starts by screening for U.S. stocks with a minimum market cap of $100 million. The ETF then uses its own "proprietary screening methodology" to identify innovative companies by analyzing company self-reported data and third-party data. Factors they look for include:

• Pricing power, defined by price elasticity which refers to the company's ability to increase prices for products and services without lowering demand. 
• Strong customer engagement, satisfaction, and retention.
• Development of new products and services, especially technological and digital innovations versus peers and their industry. 
• Development of physical or digital infrastructure designed to enable broader technological use in the industry within which the company operates. 
• The company's track record of disrupting mature industries or operating within disruptive ones, especially on their pattern of launching new products first-to-market. 
• Companies that are founder-led and spend more on research and development

Once innovative companies with pricing power are identified, PP then uses bottom-up fundamental analysis of each company by assessing growth metrics like price over earnings-to-growth ratio (PEG), revenue growth, and margin growth. A total of 25-60 securities will be held at any time.  

How the MeetKevin ETF hedges risk

What's noteworthy about the MeetKevin ETF is its ability to enter into a "defensive" position if the fund manager deems there is significant market risk. PP is able to hedge its position by taking positions in certain ETFs that the manager thinks will benefit from the market risk. 

In the prospectus, the ETF gives examples of geopolitical risk, Fed monetary policy decisions, and extreme weather events. They don't give any specific examples asides from using an oil industry ETF to hedge against elevated energy prices from a war, but some examples I could think of include the following:

• Going long on U.S. dollar ETFs to hedge against inflation.
• Going long on broad commodities ETFs to hedge against inflation.
• Going long on aerospace and defense ETFs to take advantage of conflicts.
• Going long on inverse long-duration bond ETFs to take advantage of rising rates. 
• Going long on utilities, healthcare, and consumer staples ETFs to hedge against a recession.

Depending on the fund manager's assessment of the macroeconomic environment, up to 30% of the fund may be deployed into one of these "macro-hedges." 

Use cases and risks of the MeetKevin ETF

I think the MeetKevin ETF is one of the most clear-cut examples of a truly actively managed ETF today. Its strategy is very specific and proprietary, unlike some other ETFs with a more transparent, systematic, and quantitatively rigorous methodology. 

As with all actively managed ETFs, manager risk is the biggest risk factor. The ETF's prospectus acknowledges this on pages 3 and 4 respectively:

• New Sub-Adviser Risk. The Sub-Adviser is a newly formed entity and has no experience with managing an exchange-traded fund regulated under the 1940 Act. As a result, there is no long-term track record against which an investor may judge the Sub-Adviser’s effectiveness.
• Management Risk. The Fund is actively-managed and may not meet its investment objective based on the Sub-Adviser’s success or failure to implement investment strategies for the Fund.

I think the case for investing in PP really boils down to how familiar an investor is with MeetKevin and whether or not his security selection strategy can outperform a buy-and-hold indexing one. We know that most actively managed funds fail to beat their index counterparts net of fees over the long term, so PP is fighting an uphill battle. It charges a pretty hefty expense ratio of 0.77% too. 

That being said, I am a fan of the "macro-hedging" component. If an ETF is going to be actively managed, it should at least be considerate of, and be able to take, a defensive posture. Many actively managed ETFs outperformed this year for that reason. 

As with all hyped-up investment products, caveat emptor.

Please note this article is for information purposes only and does not constitute investment advice.