The Meet Kevin Pricing Power ETF (NYSEARCA:PP) is an interesting actively-managed ETF that may catch the eyes of investors with its unique name or with its 22% year-to-date return. However, despite this strong 2023 performance, caution is likely warranted going forward for two key reasons. I’m neutral on PP based on its heavy concentration risk and its sky-high fees.
What is the PP ETF’s Investment Process?
PP is an actively-managed ETF that seeks to achieve long-term capital appreciation by investing in what it calls U.S.-listed “innovative companies,” according to mketf.com.
The fund manager defines these innovative companies as those that are “involved in the development of new products or services, technological advancements, consumer engagement, and/or disruptive approaches with respect to business growth that the Sub-Adviser expects to have a significant impact on the market or industry in which the company operates.”
PP will then invest in “Innovative Companies that, in Kevin’s view, also have more ‘pricing power’ than their peers.” Meet Kevin (the fund manager) defines pricing power as the “ability to potentially increase prices for products and services without a corresponding drop in demand.”
To select the innovative companies that the fund will invest in, Kevin then screens an “extremely large initial universe of U.S.-listed companies with a minimum market capitalization of $100 million utilizing a proprietary screening methodology. Then, Kevin analyzes the remaining initial universe of companies to identify those innovative companies that Kevin perceives as having pricing power versus their peers.”
These are all good traits to look for when investing in a company, but this approach also leaves quite a bit up to the discretion of the fund manager.
At this point, it might be a good time to take a quick detour and ask, who is the eponymous “Kevin” of the Meet Kevin Pricing Power ETF?
Who is Kevin?
The Kevin of “Meet Kevin” is Kevin Pathraff, a popular YouTube personality with nearly 1.9 million subscribers. He describes himself as a licensed financial advisor and real estate broker, and he is also a commentator on topics including finance, politics, and news. He is perhaps best known as a real estate investor whom Curbed described as a “landlord influencer.”
He also ran as a Democrat to replace California governor Gavin Newsome during the 2021 gubernatorial recall election, where he won 9.6% of the vote but ultimately came up short.
Meet Kevin’s Holdings
One key reason for caution with the PP ETF is that there is quite a bit of concentration risk here. The fund holds just 16 positions, and its top 10 holdings make up 85.8% of the fund.
Below, you’ll find an overview of top 10 holdings using TipRanks’ holdings tool.
Perhaps most concerning, top holding Tesla makes up a quarter of the fund’s assets. This has been a great thing for PP investors this year, as shares of Tesla surged and took the price of PP with it, but Tesla is a volatile stock, and this outsized position in the firm can lead to a lot of downside for PP investors if Tesla slumps.
Similarly, PP also has fairly large positions in both Enphase Energy and Nvidia of 13.4% and 10.0%, respectively, meaning that nearly 50% of the fund’s assets are in just these three stocks.
Furthermore, many of these holdings are what you could call priced for perfection. For instance, Tesla trades at 63.7 times earnings, while Nvidia trades at nearly 100 times earnings. Other top holdings like Advanced Micro Devices and The Trade Desk trade for 35.1 times earnings and 261 times earnings (53.8 times forward earnings), respectively. When stocks trade with valuations this high, they can go down quickly when things go wrong.
Part of the reason that investors use ETFs is to gain diversified exposure to specific sectors of the economy or large swaths of the stock market, which helps to limit downside risk, but you aren’t going to benefit from that in a fund with this much concentration in just a handful of stocks.
Sky-High Expense Ratio
The other reason for caution with the PP ETF is its strikingly high expense ratio of 0.77%.
An expense ratio of 0.77% means that an investor allocating $10,000 into this fund will pay $77 in fees in year one, which is pretty steep. But that’s nothing compared to how these fees can compound over time. Assuming the fund returns 5% per year going forward and keeps this expense ratio, this same investor will pay $246 in fees over the course of three years. Over the course of 10 years, the investor would pay $1,155 in fees, meaning that well over 10% of their initial investment would be eaten up by fees.
Is PP Stock a Buy, According to Analysts?
Turning to Wall Street, PP earns a Moderate Buy consensus rating based on 12 Buys, five Holds, and zero Sell ratings assigned in the past three months. The average PP stock price target of $28.36 implies 39.1% upside potential.
Investor Takeaway
PP is a unique ETF with an interesting strategic focus, and I’ll give the fund credit for that. It’s also done very well for its holders year-to-date, and its active manager picked some strong winners this year, which it also deserves credit for. However, I’m also concerned about the fund’s high level of concentration in just a small number of expensive stocks, which could see these year-to-date gains quickly go in the other direction (as they have recently) if disproportionately large positions like Tesla or Nvidia struggle.
The ETF’s expense ratio of 0.77% is also quite high. In fairness, PP is an actively-managed ETF, so it’s natural that its expenses are going to be higher than those of an index fund. However, this is still a lot to pay for a new ETF that is yet to establish much of a long-term track record, or really any ETF for that matter.
You can alternatively invest in ETFs like the Invesco QQQ Trust or the Technology Select Sector SPDR ETF that give you exposure to the same stocks like Tesla and Nvidia for a fraction of the price. QQQ’s expense ratio is 0.20%, while XLK’s is just 0.10%. Plus, these funds have built up strong track records of consistent success over many years, whereas PP has not been around for long enough to do this, having launched in November 2022.
The ETF is certainly an interesting one, but for these reasons, as they say on Shark Tank, “I’m out.”
