Tema Monopolies and Oligopolies ETF

This active ETF invests in high-quality companies that enjoy a "wide moat". Most of the time, these companies are defensive and resilient, thanks to high barriers to entry (e.g., regulation), a good track record and the ability to grow.high return on capital or pricing power, which ensures a certain regularity of earnings.

The management team seeks to focus on companies operating in less competitive industries, which often leads to the domination of a few large companies. The gaps are palpable (e.g. non-reproducible physical assets, exclusive intellectual property, explicit monopoly, etc.). And companies have a sustainable competitive advantage over time (we're not just interested in analyzing gross margin and ROIC > WACC). CFROI (cash flow return on investment) is 17% for the ETF, versus 12% for the S&P 500 and 9% for the MSCI World.

The examples of Canadian Pacific Kansas City and Visa are given. Both companies operate in explicit duopolies (Canadian Pacific with Canadian National and Visa with Mastercard).

Since launch in October 2023, performance has been similar to that of the MSCI World (35.81% vs. 35.66% for the benchmark at 09/30/2024).

It comprises 36 positions, with the top 10 stocks being : Moody's, GE Aerospace, Fair Isaac, Intercontinental Exchange, Visa, S&P Global, The Sherwin-Williams, Copart, MSCI and Intuit.

It is mainly made up of mega caps (over $200 billion in market capitalization) for 18% and large caps (between $10 and $200 billion in market capitalization) for 82%.

The majority of assets are invested in the United States (82.07%), Canada (4.18%), the Netherlands (4.10%) and Ireland (2.63%). Other countries account for 7.02%.

The sector breakdown is close to that of the world indices: Technology weighs 22%, followed by Industrials (19.66%), Financials (15.98%), Business Services (15.66%), Healthcare (11.82%), Basic Materials (7.4%) and Consumer Discretionary (5.52%).

ETF identity card

  • Primary exchange: CBOE BZX Exchange
  • Management: Active
  • Launch date: 05/10/2023
  • Assets under management: $12m (very low, beware!)
  • Number of positions: 35-36
  • Ticker: TOLL
  • Fees: 0.55

A sustainable competitive advantage

While this ETF may seem a little too risky to me due to its concentration and very low assets under management, its presentation is no less interesting for long-term investors. It allows me to introduce Warren Buffett's concept of "moat". It refers to the fact that a company creates a moat that is virtually impassable to the competition.

In other words, it represents a company's ability to thrive over time in a highly competitive environment, thanks to a differentiating factor that gives it an edge over its competitors. In this case, market structure (monopoly, oligopoly) and large market share are differentiating elements that reflect leadership due to operational excellence (discovery or favorable regulation).

Oligopolistic market structures

The notion of "moat" enjoyed by most companies operating in monopolistic or oligopolistic structures.

These industrial structures may be due to :

  • economies of scale (e.g. elevator manufacturing)
  • strong network effects (e.g. financial exchanges)
  • non-reproducible physical assets (e.g. railroads)
  • Regulation (e.g. pharmaceuticals)
  • High switching costs (e.g. credit agencies)

The existence of an oligopoly can be the result of a state's desire to ensure that the market functions properly, of regulation, or of natural barriers to entry such as heavy initial investment. In most cases, it is not in a company's interest to be numerous in a market. Instead, they must try to capture a large market share and make demand inelastic. The result is market stability and a degree of visibility for companies and investors alike. The second advantage of an oligopolistic situation lies with the players who crush the market. They can set their own prices. Their profit margins are generally well above the market average.

Although this ETF is risky (low AUM, little history, concentrated, actively managed), it does showcase the high-quality companies available in this thematic list on oligopolies.