As the market continues to climb higher, novice and experienced investors alike have been on the lookout for the next big growth play.
E-commerce, electric vehicles, cryptocurrencies and more have benefited as a result. Investors who felt uncertain about picking individual stocks might have opted for investment via exchange-traded funds (ETFs), a lower-volatility vehicle for investing in market themes.
ETFs have gained popularity in recent years, with a recent survey suggesting more than half of investors now have portfolio exposure to active ETFs. Thematic ETFs in particular are becoming more popular for investors looking to invest in technology and environmental themes.
Enter ProShares, which recently announced a slate of six new funds targeting the big growth trends of tomorrow’s economy. From cutting-edge tech themes like nanotechnology and smart factories to clean tech and on-demand services, these new ETFs make it easy for anyone to invest in complex themes without having to worry about picking the company that will beat its peers.
Just take it from Scott Helfstein, Executive Director of Thematic Investing at ProShares:
“Picking winners in emerging industries can be a challenge and simultaneously, focusing allocation on large caps could overlook small growing firms with innovative technology. Any targeted or thematic investment has a degree of risk, but investing through a basket of companies means the theme and innovation hopefully drives the investment rather than idiosyncratic company factors.”
To further break down the specifics of these funds, InvestorPlace asked Helfstein a number of questions, explaining the kind of investors who should consider these funds, how the funds fit into a portfolio and why now is a good time to invest in these themes. Read on for our conversation below.
InvestorPlace: What kind of investor are these ETFs for?
ProShares: The six new funds are geared for growth-minded investors as third-party forecasts generally predict double digit market growth for each of the themes. That said, investors can use thematics in different ways. I think of long-term secular growth as a first principle and themes like nanotechnology or smart materials are good examples. That said, there could be cyclical reasons that themes are more attractive given underlying market or economic conditions.
For example, themes that help companies lower costs like smart factories, big data and cleantech could be attractive in an inflationary environment. With elevated savings rates and consumer spending, on-demand platforms and smart factories could be interesting. If U.S. government stimulus focuses on green energy and onshoring technology production, cleantech and smart factories should gain favor. Themes are designed to appeal to a range of investors with different goals, but the important element is that many of these ideas and companies are additive to existing portfolios. They are not providing the “same old” exposures.
InvestorPlace: What about the current moment makes it a good time to invest in megatrends that may not come to mass market for years if not decades?
ProShares: Two points to consider: the market is forward-looking and the pace of innovation is accelerating. Investors should always remember that the market is a forward-looking mechanism. In theory, all information known about today and expectations for the future are priced into financial assets. Prices change when new information comes to light or expectations shift. Investors often have to be out front of long-term trends to realize the benefit.
An important aspect for those of us launching new funds is finding emerging industries that are early in the “slope of enlightenment” in the hype cycle, but ideally those that have moved past the “peak of inflated expectations.” In other words, we do not want to be too early before technology is commercially viable, but we do not miss the opportunity as growth accelerates.
A word of caution around the idea that megatrends come to fruition over decades. Some trends like demographic shifts can take decades, but demographic forecasts tend to be relatively stable and well-known. Other transformations that were supposed to take extended periods of time, like rollout of nanotech-enabled mRNA medicine, transition to cloud computing, adoption of streaming services, or investment in renewable energy happened rather quickly. The pace of scientific advancement and industrial innovation is moving rapidly and waiting may mean missing out.
InvestorPlace: Tell us a little about the new thematic ETFs and why ProShares is interested in these sectors.
ProShares: A common link that runs through these six funds is a focus on the future of business. Operating in today’s competitive climate, companies need to continuously optimize their models which includes the full range of activities from developing innovative products to connecting with customers. There is an arms race of sorts underway as businesses look to grow revenue and find efficiencies simultaneously and the six ETFs we recently launched focus on companies providing the tools and resources.
- ProShares S&P Kensho Cleantech ETF (NYSEARCA:CTEX)
The International Energy Agency forecasts that global energy needs will rise by 20% over the next decade. While renewables are still a small part of the mix, they are likely to grow by 60% over the next 10 years (compared to fossil fuels, which will grow closer to 10%). This translates into trillions of dollars of investment in renewable energy and this fund focuses narrowly on companies developing and producing the technology critical to making alternative energy sources like wind turbines, solar panels and hydrogen competitive.
- ProShares Big Data Refiners ETF (NYSEARCA:DAT)
Data is an increasingly valuable commodity, as The Economist pointed out on a 2017 cover and plays an important role in identifying business efficiencies. The sheer volume of data produced, 64 zettabytes in 2020, means that raw data — like oil — needs to be refined. There is a rapidly growing industry focused on helping companies to structure, analyze and summarize data for activities across the value chain and help power the use of technologies like artificial intelligence.
- ProShares S&P Kensho Smart Factories ETF (NYSEARCA:MAKX)
Industrial automation is an imperative, not a luxury. The four largest economies (U.S., Europe, China and Japan) face worker shortages as the population ages. More people will demand more goods, meaning existing workers must become more productive and automation of manufacturing is the primary means of producing more goods with less labor.
The fund uniquely focuses on automation in factories, critical to addressing growing demand, especially while there is pressure to onshore production amidst slowing global trade, supply chain disruptions and rising production costs from labor and commodities.
- ProShares On-Demand ETF (NYSEARCA:OND)
The on-demand economy is becoming the economy, as consumers want services at the touch of a button. In fact, on-demand services account for more than 60% of U.S. consumer spending. This is the first fund that delivers a range of on-demand services such as entertainment, fitness, food delivery and ridesharing in a single package. Streaming, already a dominant means of accessing entertainment is expected to grow almost 15% a year, ridesharing at 17% a year and connected fitness at 31% a year.
While these platforms seem ubiquitous today, they will see rapid growth and represent the new standard by which companies will connect with customers and deliver services.
- ProShares Nanotechnology ETF (NYSEARCA:TINY)
The future is smaller, faster and smarter. Nanotechnology will play a role in advancing numerous fields from medicine to space exploration. Nanoscale technology is essentially invisible to a conventional microscope, but already used in products ranging from sunscreen to semiconductors. In fact, nano-lipid technology was a critical component in mRNA COVID-19 vaccines. This is the only nanotech fund currently on the market and provides cross sector exposure to this rapidly emerging yet commercially viable technology.
- ProShares Smart Materials ETF (NYSEARCA:TINT)
Just as important as how we make things is what we make them with. Innovation in the smart materials space is really remarkable. A flexible layer of graphene no thicker than a sheet of paper could hold up an elephant and serves as an excellent electrical conductor to boot. This is the first fund to focus on smart materials that adapt to external stimulus such as light, heat, electricity, pressure and pH.
This will help across a range of activities such as making airplanes lighter, medical supplies more effective, buildings stronger and electrical materials from solar panels to batteries more efficient. Imagine clothes that change color with a touch of your cellphone screen.
InvestorPlace: What sets these funds apart from other ProShares offerings geared towards disruptive technology and mega trends?
ProShares: The new funds represent unique investment opportunities in the ETF space, but they are consistent with the ProShares thematic value proposition of creating investment opportunities based on technological innovation, shifting customer behavior and changing demographics that reshape everyday life. The new funds, and the companies included in the baskets, will likely be additive to most investors portfolios.
ProShares existing thematic offerings focused on disruption in retail from the growth of ecommerce, pet care and infrastructure. There is little overlap between the funds themselves. For example, OND focuses on platforms that offer seamless delivery of services, while the ProShares Online Retail ETF (NYSEARCA:ONLN) targets the way customers are getting their goods.
Similarly, CTEX focuses on companies developing and building technology for renewable energy whereas the ProShares DJ Brookfield Infrastructure ETF (NYSEARCA:TOLZ) invests in the owners and operators of infrastructure assets including energy. Many of the funds are complementary, but the new funds are unique and additive to the lineup.
InvestorPlace: Some of these funds, like CleanTech and On Demand, deal with technology used in our daily lives. Others, like Nanotechnology or Smart Materials, feel like investing in something out of a sci-fi movie. How should investors think about their investments in such early-stage tech sectors?
ProShares: Nanotechnology has helped improve sunscreen and played a critical role in breaking through barriers in semiconductor performance to power adoption of the smart phone. We talk about themes in a sci-fi context, but the reality is that even the most innovative-sounding themes are relevant to everyday life. My daughter’s glasses that tint in sunlight are an everyday example of smart materials. That said, innovation in smart materials, for example, is pushing limits with synthetic spider webs stronger than steel and fabric that changes properties based on electrical current. Nanorobots are early in development but offer tremendous possibility in areas from health to industrial production.
InvestorPlace: More broadly, why “future industries?” The future certainly has exciting innovations that will come to the market in the future, so why invest now? Isn’t it risky?
ProShares: The terms early-stage or risky should be put in context as these new funds invest in publicly traded companies. While some companies may be reinvesting in rapidly growing emerging areas, they are not start-ups. An advantage of the ETF wrapper, as well as thematics, is that investors get a basket of companies tied to the theme that can range in size from mega- to small-cap.
Picking winners in emerging industries can be a challenge, and simultaneously, focusing allocation on large caps could overlook small growing firms with innovative technology. Any targeted or thematic investment has a degree of risk, but investing through a basket of companies means the theme and innovation hopefully drives the investment rather than idiosyncratic company factors.
InvestorPlace: Different industries often have success stories in their own ways, making investing in different sectors incredibly variable. Do all the funds follow the same makeup in terms of company diversity, or does it depend between industries?
ProShares: Sector rotation, style investing and market cycles are part of the investing landscape. While high growth economic segments may buttress investors over the long-term, different themes will ultimately come in and out of favor over the short-term. The experience of the last two years put that on display, as high-growth and innovative themes performed well in 2020, but fell off against cyclical reopening trades in 2021 (despite strong fundamentals for many growth themes).
Most of the funds generally hold 20 to 40 names. These baskets are relatively concentrated with regards to number of companies, but many of these themes cut across sectors. For example, Nanotechnology includes companies from healthcare, information technology and materials. The funds also draw from a range of cap structures. The advantage of thematic investing is the ability to focus on emerging areas of the economy and the best way to capture the opportunity as opposed to a one-size fits all allocation framework.
InvestorPlace: One day these industries will grow into their expected valuations — does ProShares have any expectation on when that will happen, and what will happen when they do?
ProShares: The six new themes are at various stages of development. Big Data Refiners is already a large industry at $208 billion, bigger than the Consumer Staples Household & Personal Products sub-sector at $177 billion, and is expected to grow at 11% annually through 2026 according to Expert Market Research. Nanotechnology is forecasted to grow 18% annually through 2028 based on estimates from Emergen Research.
Many of these themes are priced for growth, but we believe the opportunities could be realized rapidly as the pace of innovation accelerates. Technological advances and growing markets in each of the new themes suggests that these could be strong investment opportunities today and for years to come.
On the date of publication, Vivian Medithi did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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