The InvestorPlace Q&A: ProShares Pet Care ETF Is a Treat for Investors

pet care industry - The InvestorPlace Q&A: ProShares Pet Care ETF Is a Treat for Investors

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Few pet owners look at their furry companions and think “big business.” But the pet care industry — from pet health, pet food and pet stores and supplies — sits atop an installed base many business owners would kill for. This year, there are more than 63 million dog owners in the United States, and more than 67% of American households have at least one pet. While the novel coronavirus decimated markets, trends in the pet world stand firm. A survey by Statista shows that 76% of pet owners bought the same amount of pet food through online stores, while 17% increased their spending. Indeed growth remains strong. And the worldwide pet care industry expects to surpass $200 billion per year by 2025.

ProShares Pet Care ETF (CBOE:PAWZ) leads the pack of high-growth pet stocks. It’s the first exchange-traded fund tracking the pet care industry, debuting in November 2018. Since then, it has grown like clockwork. As InvestorPlace contributor Todd Shriber said, PAWZ has “significant” upside past the $41 area. While “only” gaining 8.8% since inception, the ETF surged by 23% in 2019. It’s now at $46.79, as of this writing.

But what are the components that make this specific fund compelling? To learn more, I spoke with ProShare’s Global Investment Strategist, Simeon Hyman, who elaborated on the investment opportunity in the pet care industry. He talked with InvestorPlace about ProShares’ interest in the pet care space, Covid-19’s impact on the industry and the individual stocks in the PAWZ portfolio:

John Kilhefner, Managing Editor, InvestorPlace: Who should invest in PAWZ?

Simeon Hyman, Global Investment Strategist, ProShares: People who own pets may find the drivers of the investment opportunity very familiar to them — similar to the investor Peter Lynch’s quote, “Own what you know.” But the compelling attributes of the pet care industry position PAWZ as a valuable addition to the equity portfolio of a wide range of investors — pet owner or not.

InvestorPlace: Tell me about the methodology behind ProShares’ Pet Care ETF.

Hyman: ProShares Pet Care ETF (PAWZ) is the only ETF that allows investors to capitalize on people’s passion for their pets. Globally, billions of dollars are spent on the care of our pets, and this ETF invests in U.S. and international companies that potentially stand to benefit from that spending. It follows the FactSet Pet Care Index, which is a modified market-cap weighted index, and to be part of the index, companies must derive significant revenue from one of eight pet-care-related FactSet subindustries, such as veterinary pharmaceuticals or pet and pet supply stores.

InvestorPlace: The global pet care industry expects growth in the range of $132 billion in 2016 to $203 billion in 2025. What is driving this growth, and where do you see the potential for investment?

Hyman: This growth has been driven by a number of factors:

  • First, pet ownership is on the rise. Seven of every 10 households in the U.S. have pets. In fact, more households have pets than have children.
  • Second, pets are increasingly thought of as part of the family, and many owners will spend whatever it takes to enhance their pets’ lives and keep them healthy. Beyond meeting basic needs, pet owners are spending billions on premium foods, advanced healthcare, insurance policies, luxury services and more.
  • Third, there have been over 160 merger and acquisition transactions in the pet care industry over the past two years, indicating that established companies, as well as investors, are being attracted to this dynamic opportunity.

InvestorPlace: Why have millennials and baby boomers demonstrated a higher propensity to own pets than other generations have?

Hyman: For millennials, pets are frequently seen as starter children, as they tend to marry and start families later than previous generations. In fact, when buying homes, pet suitability is a big consideration of millennial owners. For baby boomers, as they retire and their children reach adulthood and leave home, they are increasingly adopting pets as companions.

InvestorPlace: How do millennials’ pet needs differ from the needs of boomers? Do these differences signal the potential for industry disruption?

Hyman: Millennials are often seen as digital natives and frequently use e-commerce and technology-enabled services. However, baby boomers are also shopping online and making use of internet retailers, like Chewy (NYSE:CHWY), for example.

InvestorPlace: In what ways have we seen the coronavirus pandemic affect pet ownership trends?

Hyman: In these difficult times when people are compelled to spend more time at home, there are indications that they’ve turned to their pets for companionship. New York City-area animal shelters have seen a surge in pet adoptions, reportedly running out of animals to be rescued thanks to the increased demand. Chicago’s Animal Care and Control announced that it’s joined New York as another major city to run out of adoptable dogs. Many would-be commuters are now forced to work from home, resulting in more time with their pets and likely continued spending on food, services and creature comforts.

InvestorPlace: The PAWZ ETF is down just 2.7% year to date, compared to the S&P 500’s 12.7% drop — if the U.S. does enter into a prolonged recession, how should investors consider the purpose of pet stocks in their portfolios? (Editor’s note: PAWZ is up 5% YTD vs. the S&P’s 7% loss, as of publication.)

Hyman: PAWZ’s outperformance comes as no surprise, since spending on pet care has been quite recession resistant historically, including during the 2007-2008 financial crisis when spending continued to grow. For many investors, pet care companies may represent a satellite position in a well-diversified portfolio.

InvestorPlace: Which pure-play pet stocks should long-term investors consider? How should blue-chip stocks with limited pet exposure factor into a well-rounded pet portfolio?

Hyman: PAWZ follows the FactSet Pet Care index, which crafts an effective blend of pure-play pet stocks along with diversified companies with large pet care businesses. The index is weighted more heavily to companies that generate a majority of their revenue from the pet care business. Companies such as the aforementioned Chewy, as well as pet pharmaceutical companies, including Zoetis (NYSE:ZTS), and pet insurance companies, like Trupanion (NASDAQ:TRUP), are some of those. Diversified companies, including Nestle (OTCMKTS:NSRGY) and Smucker (NYSE:SJM) — each of which have substantial pet food businesses — are also included, as they are critical players in the industry.

InvestorPlace: Which industries sit at the forefront of the explosive growth in socially distanced pet businesses? Which individual companies lead?

Hyman: E-commerce players like Chewy and PetMed Express (NASDAQ:PETS) in the U.S. and ZooPlus in Europe are benefiting from the growth of online retail. While the growth of internet retailing has been a critical trend for some time, it’s possible that the impacts of the pandemic accelerate that trend and potentially benefit digitally enabled players.

InvestorPlace: As traditional brick-and-mortar retailers race toward shuttering, how might consolidation affect the investment thesis for pet stocks?

Hyman: As one example, large consumer goods companies with vast distribution networks have made headway into pet food in recent years, as many premium brands see strong demand from grocery stores. General Mills (NYSE:GIS) acquired Blue Buffalo in 2018, and J.M. Smucker owns the Rachel Ray Nutrish brand of pet food, and these companies’ premium products are distributed through major outlets.

InvestorPlace: Lastly, how is ProShares’ Pet Care ETF riding Covid-19 tailwinds and guarding against headwinds? What can investors expect from pet stocks when the virus dies down?

Hyman: Pet owners are a devoted bunch. PAWZ’s outperformance during the acute lockdown period has been driven by pet owners continuing to spend money and take care of their pets in any way they can. Pet food and supplies — delivered both through e-commerce and consumer staples retailers that have been open during the lockdown — have been key contributors to this outperformance. On the pet healthcare front, there is likely a pent-up demand for veterinary services that have been limited during the lockdown. As society normalizes, this presents a notable potential upside for PAWZ, which has significant pet healthcare exposure. And the opportunity may have less “hair” on it, pardon the pun, than human healthcare, which faces the prospects of greater government involvement. There’s no Medicare for dogs.

In The InvestorPlace Q&A, we invite a manager to speak directly to Main Street investors, whether discussing their firm’s technologies, strategies or investments for the year ahead. Our goal is to put the spotlight on fund managers and other institutional investors of note, providing a detailed look into their management styles, world views and investing strategies. Read past interviews here. As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities. 

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