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Debunking The Misleading Big Data ETF

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.

Tracking The Sequoia Fund – Q2 2015 Update

Summary For the second quarter of 2015, the fund was up 1.96% versus 0.28% for the S&P 500. Top 10 holdings (65.5% of the fund): Valeant Pharmaceuticals, Berkshire Hathaway, TJX Companies, O’Reilly Automotive, Fastenal, MasterCard, Precision Castparts, Mohawk Industries, IDEXX Laboratories, and Google. During the second quarter, the fund cut its position in Qinetiq Group and Novozymes A/S and trimmed its third largest holding, TJX Companies. Since its inception on 7/15/1970, an investment in the Sequoia Fund (MUTF: SEQUX ) has returned 14.61% annually versus 10.88% for the S&P 500. The fund is noted for its long-term value investing style, portfolio concentration, and outperforming in down years. For more background on the fund, you can check out my original article here . The fund noted in the second quarter that it doesn’t know which way the market is going and trying to predict its direction is futile. The fund continues to look for market-leading companies that earn high returns on capital, boast strong balance sheets and self-fund their growth. The fund also likes to invest alongside motivated, ethical management teams. With over 15% of the fund in cash, the fund has plenty dry powder for when opportunities arise. Valeant Pharmaceuticals (NYSE: VRX ) continues to be the largest position in the fund by far, accounting for nearly 29% of the fund. If you’re interested in learning Sequoia’s thought process for owning the stock, check out the investor day presentation from May, you can find the link here . Valeant continues to keep busy on the acquisition front and recently acquired the “female Viagra,” a new FDA approved drug called Addyi. Here’s the fund activity for the second quarter of 2015. New Stakes: None Stake Disposals: Qinetiq Group ( OTCPK:QNTQY ) is a British multinational defense technology company. The fund acquired 23 million shares back in 2010 for a roughly 1% stake in the portfolio. The ADR traded between $6 and $8 at the time. The fund maintained its position through 2013. During the fourth quarter of 2014, the fund sold over 43% of its position. Prices ranged from $11.50 to $14.75. In the annual report, the fund noted how it has been disappointed in the results of its European companies, including Qinetiq. The selling continued in the first quarter of 2015. The fund sold 27% of its position, just over 3.5 million shares. Prices ranged from $11 to $12.50. The job was finished in the second quarter of 2015 as the fund disposed of its remaining 9.4 million shares while prices traded between $11.25 and $15.00. Novozymes A/S ( OTCPK:NVZMY ) produces and sells industrial enzymes, microorganisms, and biopolymers worldwide. The fund bought just over 2 million shares in the second quarter of 2012 when prices ranges from $25.50 to $29.50. The fund likes Novozymes for its industrial enzymes, animal nutrition, and corn ethanol enzymes businesses. It estimates the company has a dominant market share in industrial enzymes and a 60% market share in corn ethanol enzymes. It also likes that there are high barriers of entry for these businesses due to the time, expertise, and resources needed to produce its products and operate efficiently. In the first quarter of 2015, the fund sold 221k shares, or 10.7% of its position, when prices ranged from $40 to $50. The fund sold its remaining stake in the second quarter of 2015. Prices ranged from $45.50 to $49.50. Stake Increases: None Stake Decreases: Rolls Royce ( OTCPK:RYCEY ) designs, develops, manufactures, and services integrated power systems worldwide. The company is known for its expertise in making engines for wide-body jets. The fund has been in Rolls Royce since 2007. It built up the position to over 12 million shares by the end of 2008. Since then it’s held, save very minor selling. Despite continuing to hold, the fund is very concerned over the position. While it admires its jet engine business, it questions the board of directors’ recent decisions to diversify into marine engine and power generation businesses. It’s also concerned the company is abandoning its Total Care service contract selling model which was very successful under the former CEO. As for the current CEO, John Rishton, the fund says, “… in our meetings with him, has shown minimal awareness of the returns on capital his acquisitions have generated.” The fund was selling in the second quarter, trimming the position by 437k shares when prices traded between $13.75 and $16.00. The stock is now trading below $12. Perrigo Company (NYSE: PRGO ) is a developer and manufacturer of over-the-counter consumer goods and pharmaceutical products. The fund picked up just over a half million shares in the third quarter of 2010. The stock traded between $55 and $66.50. In April of this year Mylan N.V. (NASDAQ: MYL ) made an unsolicited $29 billion bid for Perrigo. At the same time, Teva (NYSE: TEVA ) made a $40 billion offer for Mylan. That eventually fell through. Mylan has since upped its bid for Perrigo to $33 billion and then again to nearly $36 billion. Mylan shareholders recently approved the transaction and the company will be taking the deal directly to Perrigo shareholders. We’ll see what happens. The fund trimmed its Perrigo position by about 13% during the second quarter. Prices traded between $183 and $215 after Mylan’s original offer. TJX Companies (NYSE: TJX ) is a discount apparel and home furnishing retailer operating under the T.J.Maxx, Marshalls and HomeGoods brands. The fund has been in TJX since 2000, when it held nearly 7.9 million shares. The position was built up to over 15 million shares by the end of 2002. The fund steadily decreased its position between 2003 and 2007, and by 2008, it was down to 4.9 million shares. The fund added significantly in 2011, increased the position size from 5.1 million to 10.2 million shares. Prices ranged from $21.50 to $32.69 in 2011. The fund still holds 10.2 million shares and the position makes up 7.88% of the portfolio. Three quarters ago, the fund sold approximately 400k shares, or 4% of the position. It sold another 1% of its position last quarter. And the selling accelerated in the second quarter as the fund sold over 3.1 million shares at prices between $64 and $70. TJX is still a top three holding for the fund, but its percentage of the portfolio has gone from 8% to 5%. Kept Steady: Omnicom (NYSE: OMC ) , Precision Castparts (NYSE: PCP ), Compagnie Financiere Richemont SA ( OTCPK:CFRUY ) , Constellation Software ( OTCPK:CNSWF ), O’Reilly Automotive (NASDAQ: ORLY ) , Jacobs Engineering (NYSE: JEC ) , Canadian Natural Resources (NYSE: CNQ ) , Sirona Dental Systems (NASDAQ: SIRO ) , Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ) , Danaher (NYSE: DHR ) , EMCOR Group (NYSE: EME ) , Trimble Navigation (NASDAQ: TRMB ) , Mohawk Industries (NYSE: MHK ) , Expeditors International (NASDAQ: EXPD ) , Valeant Pharmaceuticals (VRX) , West Pharmaceuticals (NYSE: WST ) , Zoetis (NYSE: ZTS ) , Fastenal Company (NASDAQ: FAST ) , Praxair (NYSE: PX ) , IMI plc ( OTCQX:IMIAY ) , MasterCard (NYSE: MA ) , Brown & Brown (NYSE: BRO ) , Google (NASDAQ: GOOGL ) (NASDAQ: GOOG ) , Goldman Sachs (NYSE: GS ) , International Business Machines (NYSE: IBM ) , Waters Corporation (NYSE: WAT ) , Admiral Group ( OTCPK:AMIGY ) , Hiscox Ltd. ( OTC:HCXLY ), Verisk Analytics (NASDAQ: VRSK ) , Costco Wholesale (NASDAQ: COST ) , Tiffany & Co. (NYSE: TIF ) , Wal-Mart (NYSE: WMT ) , Croda International ( OTCPK:COIHY ) , Cabela’s (NYSE: CAB ), and IDEXX Laboratories (NASDAQ: IDXX ) saw no changes from the first quarter of 2015 to second quarter of 2015. Here’s a snapshot of the activity from the first quarter of 2015 to the second quarter of 2015: (click to enlarge) Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long GOOGL, OMC, FAST, WMT. (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.