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Vaccinating a nation: can Biden manage America’s biggest health project?

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Across the US, vast “freezer farms” are popping up — warehouses containing row after row of ultra-cold storage equipment designed to house a vaccine against Covid-19 when one is approved.

These warehouses are the most visible sign of a new supply chain set up in just a few months as public officials and private companies prepare for the imminent arrival of one or more potentially world-changing drugs, at least one of which will have to be stored at temperatures colder than an Arctic winter.

The smooth functioning of this cold supply chain is vital if the US is to be able to offer vaccines to everyone who wants one, as the federal government has promised by next summer.

For president-elect Joe Biden, the vaccine plan is arguably the most important issue that awaits him. His reputation as president will probably be decided in large part by whether he can provide vaccines to enough people to help end the pandemic in a country which has recorded more than 12.2m cases and nearly 257,000 deaths.

Joe Biden and Kamala Harris speak with the Covid-19 Advisory Council during a briefing on November 9 in Wilmington, Delaware
Joe Biden and Kamala Harris speak with the Covid-19 Advisory Council during a briefing on November 9 in Wilmington, Delaware © Angela Weiss/AFP/Getty
If it goes wrong, the vaccine rollout could resemble the debacle that characterised the US response to the early stages of the virus
If it goes wrong, the vaccine rollout could resemble the debacle that characterised the initial US response to the virus © Taimy Alvarez/AP

“This is the most difficult distribution challenge we have ever faced,” says Dusty Tenney, chief executive of Stirling Ultracold, which makes some of the ultra-cold freezers needed to store the Pfizer/BionNTech vaccine at temperatures of -70C. “It is like doing Amazon’s one- or two-day delivery, but using ultra-low temperature products that have never before made it on to the market.”

Distributing a coronavirus vaccine will be a daunting task for every government around the world, especially for developing nations where it is often far harder to guarantee that doses will remain at the kind of low temperatures required for the likely two first vaccines. Oxford university and AstraZeneca’s vaccine, which has received Operation Warp Speed funding, can be stored at normal fridge temperatures, however. 

In the US, the task will be made harder not just by the country’s rugged and often sparsely-populated terrain. Other challenges include a hostile political backdrop where outgoing President Donald Trump has spent the past three weeks contesting the election results, agreeing only on Monday night to start allowing contact between administration officials and Joe Biden’s transition team. 

If it goes wrong, the vaccine rollout could resemble the debacle that characterised the US response to the early stages of the virus, when tests malfunctioned and states bid against each other in the scramble to procure personal protective equipment for healthcare workers.

It could also sow the seeds of the next great American political divide. Already Democrats are accusing the Trump administration of failing to do enough to prioritise vaccinating minority groups, while rural voters who predominantly support Mr Trump are also worried they will miss out.

But if it goes smoothly, allies of Mr Trump hope it could help rescue his reputation for handling the pandemic. And it is even more likely to determine the fortunes of Mr Biden, whose first term will be dominated by the virus and its aftermath.

Angela Rasmussen, a virologist at Columbia University, says: “The Food and Drug Administration has largely got a handle on the approval process; the big worry now for Joe Biden is, how does he distribute a vaccine, how does he do so equitably, and how does he persuade people to get it?”

Mr Biden himself encapsulated his task last week, warning: “How do we get over 300m Americans vaccinated? What’s the game plan? It’s a huge, huge, huge undertaking.”

Donald Trump holds a press conference, flanked by Moncef Slaoui (R), chief adviser to Operation Warp Speed, in September
Donald Trump holds a press conference, flanked by Moncef Slaoui (R), chief adviser to Operation Warp Speed, in September © Saul Loeb/AFP/Getty
Demonstrators pray during a recent protest in Boston, Massachusetts, against government medical mandates
Demonstrators in Boston, Massachusetts, pray during a recent protest against government medical mandates © Joseph Prezioso/AFP/Getty

Fight for supplies

After months of work, the Trump administration published its distribution plans in October. Officials say they will be able to provide vaccines for all vulnerable people — likely to be frontline healthcare workers and older people with underlying illnesses — by the end of the year; all older people by the end of January; and everyone by early summer.

Under those plans, Operation Warp Speed — the vaccine development project the president set up in May — will use a piece of software created by technology company Palantir to track supply and demand in real time. The app, known as Tiberius, promises to give federal officials access to localised data on everything from the location of doses of the vaccines to how many people live in care homes in a given area.

The administration is paying the healthcare logistics company McKesson to oversee the delivery of many of the vaccines, although not the Pfizer one which the pharmaceutical company itself is responsible for — albeit with government money and assistance.

Meanwhile, hundreds of companies, from haulage firms to freezer providers to producers of shipping containers, are bidding for a patchwork of local and federal contracts to help deliver doses. Not only does the vaccine need to arrive in the right place and in the right condition, but so do millions of needles, glass storage vials and PPE for those administering it.

Francesco Incalza, president for Europe, the Middle East and Africa for refrigerated transport company Thermo King, says of the global distribution task: “If the early vaccines are two doses each, we are talking about transporting 5bn of them in the first year — that would need 8,000 Boeing 777 flights.”

Trump officials say the plans, which have been jointly drawn up by the health department and the Pentagon, involve military-level precision. “The logistics are being worked to the minute, in an army-combat approach,” says Moncef Slaoui, head of Operation Warp Speed. “We have tabletop exercises — which are kind of rehearsals — every Friday, in which we identify areas that need more specific solutions. I feel very comfortable that it is incredibly well worked out.”

But Mr Slaoui’s task is to get the vaccine to state-designated distribution hubs: it is up to the states themselves to get them to individuals, through a network of hospitals, community centres and high-street pharmacies.

US vaccination in numbers

$25bn

Sum president-elect Joe Biden promises to spend on vaccine manufacturing and distribution

8,000

Estimated number of flights that will be needed to distribute 5bn doses globally in the first year

42%

Percentage of Americans planning to take a coronavirus vaccine, according to YouGov

This is what Biden advisers say worries them most: that a lack of direction from the federal government risks repeating the situation in spring, when states tried to buy the same items of PPE with little guidance from the federal government, leaving gaps in certain areas. Already there are signs that this is happening.

North Dakota is one of a handful of states that have been running pilot schemes for how vaccine distribution would work, even carrying out dummy runs using doses of flu vaccines.

The state, which has been hit harder than almost anywhere in the world by the virus, has bought four ultra-cold freezers to store the Pfizer vaccine, ignoring the advice of the Centers for Disease Control and Prevention. North Dakota has also bought its own dry ice machine to equip shipping containers in which it will transport doses even to its most rural communities.

But as a vaccine approval has got closer, supplies have been getting harder to come by. “Local providers are having problems getting needles and vials because the federal government is buying them all up,” says Molly Howell, the state’s immunisation programme manager. “There is also definitely a shortage of gloves and N95 masks.”

Dry ice is another concern. Earlier this year there were national shortages of the product, which is a byproduct of gasoline manufacturing, as lockdowns brought cities to a halt and crushed demand for petrol. The US Compressed Gas Association insists there will be enough to get through the winter, but another round of lockdowns could yet put that in peril.

Healthcare workers fill out patient paperwork during a drive-thru flu shot clinic in Shreveport, Louisiana, early this month
Healthcare workers fill out patient paperwork during a drive-through flu shot clinic in Shreveport, Louisiana, early this month © Dylan Hollingsworth/Bloomberg
A protest to call for safe and free Covid-19 vaccines last month in Washington
A protest to call for safe and free Covid-19 vaccines last month in Washington © Bill Clark/CQ-Roll Call/Getty

Fair distribution

Another concern of the incoming Biden team is that minority communities, many of which have been hit hardest by the disease, will not be prioritised. Though a government-commissioned report has recommended making sure black people in particular get the vaccine early, the Trump administration is leaving it up to states to decide exactly how they will allocate their doses.

In a year which has also seen mass uprisings against police violence towards black people, many fear any approach that would further entrench America’s political and cultural divisions.

Andrew Cuomo, the governor of New York, warned this month: “[The Trump administration is] basically going to have the private providers do it and that’s going to leave out all sorts of communities that were left out the first time when Covid ravaged them.” In response, Mr Trump threatened not to distribute the vaccine to Mr Cuomo’s state at all.

Helene Gayle, who co-authored a government-commissioned report on how to distribute a coronavirus vaccine fairly, is one of a number of experts whom Mr Biden’s transition team has consulted in recent weeks. She says: “The planning is just getting started, and there hasn’t been the national leadership this requires. States have been left to themselves.”

Mr Biden has promised to spend $25bn on vaccine manufacturing and distribution, hoping to plug the gaps they say have been left by the Trump plan. But properly identifying those gaps has been made harder by the fact that the president-elect’s advisers have been denied access to administration officials for weeks after the election.

The delay has already prompted warnings from senior officials, including Mr Slaoui, who said earlier this month: “It is a matter of life and death for thousands of people.”

Celine Gounder, a member of the Biden-Harris Covid-19 advisory council, has called for an overhaul of Trump’s ‘Warp Speed’ vaccine effort
Céline Gounder, a member of the Biden-Harris Covid-19 advisory council, has called for an overhaul of Trump’s ‘Warp Speed’ vaccine effort © Amr Alfiky/New York Times/Redux /eyevine
A ‘freezer farm’, a football field-sized facility for storing finished Covid-19 vaccines, under construction in Kalamazoo, Michigan
A ‘freezer farm’, a football field-sized facility for storing finished Covid-19 vaccines, under construction in Kalamazoo, Michigan © Jeremy Davidson/Pfizer/AP

Anti-vaxxer resistance

Even if all that works — if the vaccine is transported safely and in sufficient numbers from factories, to distribution hubs, to local clinics and pharmacies — whether people will agree to have the jab is another question.

An hour outside Bismarck, the capital of North Dakota, where Ms Howell has been toiling away at her state’s distribution plans, Alexis Wangler has been watching the race to get a drug approved with growing concern. Ms Wangler lives in Linton, a small town with about 1,000 residents. Like most of the state, it has been ravaged by coronavirus.

Ms Wangler’s husband believes he had the virus, having suffered fatigue and a loss of smell and taste. His grandmother definitely did, and ended up in hospital with the disease. Her co-worker’s husband is still in hospital — though he is now out of intensive care and no longer receiving supplemental oxygen. Nearly one in 10 North Dakotans have now tested positive for the disease since the start of the pandemic, and 14 per cent of those currently being tested are coming back positive.

However, none of this is enough to persuade Ms Wangler to line up for a shot. “Vaccine makers have said they are in a race to produce it, so that means corners will most likely be cut,” she says. “I’m going to take my chances with my god-given immune system, which has a way better chance of protecting me.”

Ms Wangler is not alone — only 42 per cent of Americans currently plan to take a coronavirus vaccine, according to YouGov, thanks to widespread safety concerns. Some of those are committed anti-vaxxers, many more are simply worried that this approval process has been rushed. That is far below the 70 per cent of people who experts think need to be vaccinated before enough of the population is resistant and to bring the spread of the virus to a standstill.

If Mr Biden wants to achieve herd immunity through a vaccine, he will have to persuade people like Ms Wangler. The problem is she, like most of her neighbours, did not vote for him, and does not trust him on healthcare issues — especially after he and his running mate Kamala Harris warned about vaccine safety concerns during the election campaign.

Despite being one of the states that has suffered most from the pandemic, with more than 72,000 cases, North Dakota’s vote for Mr Trump increased at the last election.

Nor is the state a one-off. An analysis by the broadcaster NPR last week found that Mr Trump increased his share of the vote in 68 out of the 100 counties with the highest Covid-19 death rates per capita — a trend seen across states that voted both Republican and Democrat.

These are the voters who feel they have been left behind by the political class in Washington, and experts warn their alienation with mainstream politics is only likely to grow if they feel they are being bypassed while the rest of the country plots an exit from the pandemic.

A free flu clinic vaccination event in Detroit, Michigan
A free flu clinic vaccination event in Detroit. If Joe Biden wants to achieve herd immunity on Covid-19 through a vaccine, he will have to persuade a growing anti-vaxxer movement © Matthew Hatcher/Getty
North Dakota National Guard soldiers administer Covid-19 tests in Bismarck. Long lines reappeared as the holiday season neared
North Dakota National Guard soldiers administer Covid-19 tests in Bismarck. Long lines reappeared as the Thanksgiving holiday season neared © Tom Stromme/The Bismarck Tribune/AP

A clear departure

Mr Biden’s allies promise he will be the country’s “healer-in-chief”, bringing the country together after a divisive four years under Mr Trump. But the phrase could also be used literally. If Mr Biden wants to be remembered for more than beating Mr Trump, he will have to manage one of the biggest, most complex and most politically-charged healthcare projects ever undertaken by the US government.

“The only comparative thing the healthcare system does right now is roll out a national flu vaccine every year,” says Eric Topol, a cardiologist and professor at Scripps Research Institute, a medical think-tank. “But that is not compulsory, it is not as difficult to handle and is nowhere near as important as a coronavirus vaccine will be.”

Those who have helped shaped Mr Biden’s distribution plans insist the president-elect will be up to the task.

“The fact is that you have a president-elect who has made controlling the pandemic one of his four priorities — that in itself is very different from what we have at the moment,” says Dr Gayle. “Everything is a clear departure from the previous approach.”



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Analysis

Square’s $29bn bet on Afterpay heralds future for ‘buy now, pay later’ trend

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Jack Dorsey’s biggest gamble to date has sent ripples around the fintech and banking world, with investors betting that Square’s $29bn all-stock deal to acquire Afterpay signals the “buy now, pay later” trend has staying power.

BNPL relies on an emerging thesis that millennials and Gen Z consumers distrust traditional credit, but still want to borrow money to buy goods. Afterpay allows shoppers to split the cost of goods into four instalments with no interest — but a late fee if payments are missed.

“We think we’re in the early days of the opportunity facing us,” said Square’s chief financial officer Amrita Ahuja, speaking to the Financial Times. “From a buy now, pay later perspective, we see, with online payments alone, a large and growing opportunity representing $10tn in payments volume by 2024.”

The deal sees Square join an increasingly crowded space, alongside big players such as Sweden’s Klarna, Silicon Valley-based Affirm and PayPal, with Apple also exploring the market. The sector also faces a brewing regulatory battle, as legislators question an industry that lends money in an instant, often without a traditional credit check to ensure a consumer will be able to pay off their debt.

“This decade is going to be the upheaval of the banking industry,” Klarna’s chief executive Sebastian Siemiatkowski, said on CNBC on Monday. “I’m a little bit surprised to see consolidation happening this early, at this level, but at the same point in time I think this is directionally what we’re going to see.”

Column chart of By downloads (% of total) showing Top US mobile payment solution apps

BNPL has exploded in popularity over the past year thanks to the coronavirus pandemic-driven boom in online shopping, but industry executives said it had shown strong growth well before the pandemic, alongside a broader trend for more flexible financing among traditional lenders.

Leading into 2020, banks including JPMorgan Chase, American Express and Citigroup each launched flexible payment options tied to existing credit cards as an answer to point-of-sale financing.

The past 18 months have seen a meaningful uptick in the number of retailers willing to adopt the extra financing option. “There’s a little bit of FOMO setting in,” said Brendan Coughlin from Citizens Financial Group.

Afterpay was among the pioneers in BNPL. It was founded by Sydney neighbours Nick Molnar and Anthony Eisen in 2014, and today facilitates global annual sales of $15.6bn.

The company went public on the Australian Securities Exchange in 2016 at a valuation of A$165m (US$122m). In May 2020, Chinese tech giant Tencent paid about A$300m for a 5 per cent stake in the Australian group, which was by then worth about A$8bn.

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The Afterpay tie-up will enable Square to offer BNPL services to its millions of merchants, who processed payments worth $38.8bn in its most recent quarter, while also tapping into Afterpay’s clients, which include Amazon and Target.

The company will also integrate Afterpay into its Cash App, which has about 70m users and is slowly being built out as a one-stop financial services shop for payments, cryptocurrency, saving and investing.

“All of a sudden, you’ve got probably the most compelling super app outside of China,” said DA Davidson’s Chris Brendler, who is an investor in both companies.

Square’s gross payment volume

Investors appear convinced. Despite the deal coming at a 30 per cent premium to Afterpay’s most recent stock price, the news sent Square’s share price up 10 per cent by Monday’s close.

“This is certainly a bull market deal,” said Andrew Atherton, managing director at Union Square Advisors. “People are rewarding Jack Dorsey for being bold and for making a big bet.”

Square’s entry into BNPL comes as the sector is becoming increasingly competitive.

Klarna increased its valuation from $11bn in September 2020 to $46bn in June of this year, making it the most valuable standalone company in the industry.

Shares in Affirm, the US online lender led by PayPal co-founder Max Levchin, rose 15 per cent on Monday following news of the Afterpay deal. Affirm, which went public in January and is now valued at $17bn, recently expanded its partnership with Shopify to offer BNPL services to the ecommerce platform’s US merchants.

PayPal first moved into BNPL back in 2008 when its then-parent eBay bought Bill Me Later. A year ago, PayPal launched Pay in 4, a six-week instalment offering that is free for both consumers and merchants, alongside its longer-term PayPal Credit service.

Earlier this year, Apple was recruiting staff for its payments division with experience in BNPL, as it looks to expand Apple Pay and its Wallet app. Bloomberg reported last month that the iPhone maker was working with Goldman Sachs to develop an Apple Pay Later service.

Industry executives warn, however, that the more crowded market could erode the businesses’ margins, while flustered consumers may also be put off by the rapidly growing number of checkout options.

“The current state of affairs, where you have seven buttons when you go to checkout, I don’t think is a sustainable state of affairs,” said one consumer finance executive at a top US bank. “I think we are in an interim period.”

A bigger threat still is the sector’s immature and inconsistent regulatory environment.

“It’s what everyone is calling the Wild West,” said Alyson Clarke, an analyst at Forrester. “There is no onus on them to make sure that you are of financial health to be able to repay that loan.”

Some companies do a “soft” credit check that briefly examines a person’s position but “not as much as they should be doing if they are lending you money”, Clarke said. “Afterpay doesn’t do any of that.”

A survey of Australian consumers, compiled by the country’s financial regulator in 2020, suggested 21 per cent of BNPL users missed a payment in the previous 12 months. Almost half of them were aged 18 to 29. Morgan Stanley analysts have estimated Afterpay makes about $70m a year on late fees.

The UK’s financial regulator has said BNPL players should be forced to adhere to its credit rules as a “matter of urgency”. In the US, a government consumer protection agency issued guidance urging caution around “tempting” BNPL deals.

In a hint at further possible tensions, Capital One in December became the first major credit card company to block its customers from using its cards to pay off BNPL purchases, calling the practice “risky for customers and the banks that serve them”, according to Reuters.

Afterpay board member Dana Stalder said the company welcomed regulation. “Buy now, pay later is just a friendlier consumer product,” he said. “Consumers understand that, they’re not dumb. This is why they are voting with their feet.”

Additional reporting by Richard Milne



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UK pushes floating wind farms in drive to meet climate targets

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In waters 15km south-east of Aberdeen, renewable energy companies are preparing to celebrate yet another landmark in the drive to end Britain’s reliance on fossil fuels.

Five wind turbines, each taller than the Gherkin building in the City of London, fixed to 3,000-tonne buoyant platforms have been towed to the UK North Sea from Rotterdam where they will form part of the Kincardine array, the world’s biggest “floating” offshore wind farm.

Wind farm developers have dabbled since the 2000s with floating technology to overcome the limitations of conventional offshore turbines. These are mounted on structures fixed to the seabed and are difficult to install beyond depths of 60m, which makes them unsuitable for waters further from shore where wind speeds are higher.

Floating projects, which are anchored to the seabed by mooring lines, are rapidly moving from the fringes to the mainstream as countries turn to the technology to help meet challenging climate targets.

Britain was the first country to install a floating offshore wind farm off the coast of Peterhead, Scotland in 2017. But existing floating projects are modest in size. The Kincardine array has an electricity generation capacity of 50MW compared to 3.6GW for the world’s largest conventional offshore wind farm.

Map showing the location of Kincardine offshore floating wind farm, offshore from Aberdeen on Scotland's east coast

Now the bigger wind developers are stepping up a gear with plans to build more schemes on a larger scale.

Denmark’s Orsted, Germany’s RWE, Norway’s Equinor along with the UK’s ScottishPower and Royal Dutch Shell are some of companies on a long list of bidders vying to build floating schemes in an auction of seabed rights for about 10GW of offshore wind projects in Scottish waters. The bidding round closed in mid-July with the winners expected to be announced in early 2022.

The UK is separately examining an auction exclusively for floating wind in the Celtic Sea, the area of the Atlantic Ocean west of the Bristol Channel and the approaches to the English Channel and south of the Republic of Ireland.

Developers expect the costs of floating projects to fall rapidly as more projects are deployed. In 2018 floating wind costs were estimated at more than €200 per megawatt hour, nearly double the cost of nuclear power in the UK.

The Offshore Renewable Energy Catapult, a UK technology and research centre, is hopeful developers will be able to build “subsidy free” floating projects at prices below forecast wholesale electricity costs in auctions as early as 2029. Conventional offshore wind developers reached this inflection point in a UK government auction in 2019.

A Norwegian flag flies from a boat near the assembly site of offshore floating wind turbines in the Hywind pilot park, operated by Equinor
Norway’s Equinor is among the companies competing to build floating turbines in Scottish waters © Carina Johansen/Bloomberg

UK prime minister Boris Johnson, who is hosting the UN’s COP26 climate summit later this year, has set a 1GW floating target out of a total 40GW offshore wind goal by 2030. He has underlined the importance of accessing the “windiest parts of our seas” as part of the UK’s goal to cut carbon emissions to net zero by 2050. 

Other countries including France, Norway, Spain, the US and Japan are pursuing the technology, which experts said would particularly appeal to countries with limited access to shallow waters, or where the geology of the seabed makes it impossible to install conventional “fixed-bottom” turbines.

WindEurope, an industry body, predicts one-third of all offshore wind turbines installed in Europe by 2050 could be floating.

Countries pursuing floating wind are interested in it “not just as an opportunity to deliver net-zero targets. It has a real potential to be a driver of economic growth as well,” said Ralph Torr, a programme manager at the Offshore Renewable Energy Catapult.

Much like how the UK supply chain has lost out to foreign companies in the construction of conventional wind offshore farms — despite Britain having more than anywhere else in the world — there are concerns the mistakes will be repeated for floating technology. Manufacturing work for the Kincardine project was carried out in Spain and Portugal and the turbines and foundations assembled in Rotterdam.

An offshore wind turbine off the coast of Fukushima, Japan
A wind turbine off the coast of the town of Naraha in Japan’s Fukushima prefecture. Japan is one of the countries pursuing floating technology © Yoshikazu Tsuno/AFP/Getty Images

Competition with other markets was already high as they all tried to gain a “first-mover advantage”, said Torr, who warned the UK government’s 1GW floating wind target by 2030 was not “going to unlock huge investment in the supply chain or infrastructure because it’s [just] a handful of projects”.

The Offshore Renewable Energy Catapult and developers are urging the government to commit to a second target in 2040 for floating wind, which they believe would provide confidence to industry to invest in the necessary facilities in Britain.

“Because floating [wind] becomes economic in the 2030s, it’d be much better to understand what the longer term pipeline is,” said Tom Glover, UK country chair at RWE. He added that in the Scottish seabed rights auction, developers had to “provide a commitment and an ambition for Scottish content”, which should benefit the local supply chain.

Wind developers are conscious that UK suppliers need time to gear up. Christoph Harwood, director of policy and strategy at Simply Blue Energy, which is developing a 96MW floating scheme off the coast of Pembroke in Wales, said projects that were larger than the earliest floating schemes but were not yet at a full commercial scale would be important in that process.

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“If the UK supply chain is to benefit from floating wind, don’t rush into 1GW projects, take some stepping stones towards them,” he said.

Tim Cornelius, chief executive of the Global Energy Group, which carries out offshore wind assembly work at the Port of Nigg on the Cromarty Firth in north-east Scotland, said the size of floating wind turbines offered opportunities to UK suppliers. 

The floating turbines are much bigger than their conventional offshore counterparts so need to be built closer to their point of installation, which precludes using the lowest cost manufacturers in China and the Middle East.

The floating turbines require “an astonishing amount” of deepwater quayside space at ports, Cornelius explained. His company is looking at creating an artificial island for quaysides in the Cromarty Firth in Scotland, which he says would require a “material investment but is entirely justifiable as long as developers are prepared to commit”.

But he warned that “as it currently stands, the [UK] supply chain isn’t in a position to be able to support the aspirations of the [floating offshore wind] industry”.

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Analysis

China tech crackdown claims ETF victims

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Exchange traded funds updates

Beijing’s regulatory crackdown on some of its biggest companies in technology and education has delivered a bruising blow to highly specialised China-focused exchange traded funds.

Broad-based tech ETFs have sailed through virtually unscathed, but some narrowly focused thematic instruments have taken a beating. Among those most affected, the KraneShares CSI China Internet ETF (KWEB) has nearly halved in value since its peak in February.

Some ETF buyers are hunting specifically for targeted strategies, despite the risks. But Kenneth Lamont, senior fund analyst at Morningstar, said this highlights the potential drawbacks of tracking a narrow theme without the flexibility to shift tactics.

“The [passive thematic] strategy has no way to quickly react to bad news and will hold the stock until the next rebalance. The small number of fund holdings also means that overall returns can be influenced by the performance of handful of stocks,” Lamont said.

Line chart of Total returns, year to date (rebased) showing Narrow vs broad tech ETF

He noted that for the KraneShares ETF, one Chinese education group alone — TAL Education Group — was responsible for knocking 2.8 percentage points off performance from the end of June.

Global X Education ETF (EDUT), which has a large exposure to the Chinese online education sector, was also badly affected.

Actively managed ETFs, such as Ark Invest’s ARKK flagship Innovation fund, can react more quickly. After voicing her optimism for the prospects for China’s tech disrupters earlier this year, Cathie Wood, Ark’s chief executive, shed millions of dollars worth of shares in four China-domiciled companies.

Line chart of Number of shares held (millions) showing ARKK has been selling Chinese technology holdings

Investors in ARKK have not been rewarded as well as those who simply put their money in broadest based funds such as the Vanguard Total World Stock Index Fund ETF (VT), but they have still managed to ride out the China tech storm far better than more exposed counterparts.

Line chart of Returns, year to date (rebased) showing ARKK vs Vanguard Total World Stock ETF (VT)

Some investors insist Chinese investments can bounce back. Mark Martyrossian, chief executive of UK-based Aubrey Capital Management, said he believed many of the affected tech companies would maintain their market leadership.

“The gravy train may have slowed but you disembark at your peril,’ Martyrossian said.

Lamont said badly hit funds had suffered such losses because they were doing exactly what they had promised to do — provide narrow exposure.

More nimble active investment strategies also face their own challenges, said Elisabeth Kashner, director of global fund analytics at FactSet. “Active managers may successfully anticipate market reversals, but they can also miss them, sometimes seriously tanking returns,” she said. “Some people can be skilful and some people can be lucky and if you’re lucky and skilful in one period you might be lucky and skilful in the next, but you might not.”

Additional reporting by Steve Johnson

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