Global X Research TeamThematic ETFs have grown assets nearly fourfold since 2015, as investors increasingly incorporate long term macro-level trends into their portfolios.1 In this webcast, the Global X research team discusses the latest research on disruptive themes, touching on fast growth areas like cannabis, video games & esports, and cybersecurity, along with thematic valuations, and how thematic ETFs can be used in a portfolio.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular.
Transcript
Operator: Hello and welcome to today’s webcast. What’s Next for Thematic Investing? Sponsored by Global X ETFs. With that, I’d like to go ahead and turn it over to today’s first speaker, Jay Jacobs, Head of Research and Strategy for Global X ETFs. Jay.
Jay Jacobs: Great. Thank you, Natalie and thank you everyone for joining us today. As Natalie mentioned, my name is Jay Jacobs. I’m the Head of Research and Strategy at Global X ETFs. I’m joined here by our Thematic Research Analyst, Pedro Palandrani. The two of us are going to go over what’s next in thematic investing and we’ll be covering a variety of different topics.
Very briefly, an overview of Global X ETFs and who we are. We are a New York based ETF manager with 72 ETFs ranging across a variety of suites, but as we’ll be talking about today, we have a whole host of thematic growth funds with over three billion in assets. We’re going to be doing a deep dive into the thematic space and how ETFs can be used to help achieve those thematic exposures.
The plan for today, I’ll provide an overview of thematic investing and why we think a lot of these themes are very well set up today for massive amounts of disruption around the global economy. Then I’ll be passing it off to Pedro who will walk through some specific themes that we’ve been keeping our eye on for a while from cannabis to video games and esports to cybersecurity. Then we’re going to talk a little bit more about blending themes together. Multi-theme strategies, where they fit in the portfolio, and how to look at valuations. Finally, we will finish things off with looking at the convergence of various themes and we will keep time at the end for Q&A.
With that, to give a little bit of background, we define thematic investing as the process of identifying disruptive macro-level trends and the underlying investments that stand to benefit from the materialization of those trends. This is truly a top-down, bottom-up approach. From the top-down, again, looking at what are these big disruptive themes that are changing huge areas of the global economy. From the bottom-up, what are the companies that stand to benefit. Who are the very well-positioned companies around the world, across sectors that could benefit from the rise of theme like diverse security or video games and esports or cannabis?
What we like about thematic investing is that these are long-term growth-focused strategies. They are unconstrained by geographic and sector definitions. We don’t care if a cybersecurity company is based out of the US or Germany or classified as a tech company or a communication services company. We just want to own the companies that are the best positioned. Because these tend to be more concentrated approaches, they tend to have low correlations to other growth strategies in a portfolio. These are also very relatable concepts. Many people are familiar with cybersecurity through their own jobs or from their interaction with the internet at home. They might be a gamer themselves or have kids who are gamers. These are usually concepts that translate into the real world in a much more tangible way than some other areas of finance.
There’s a few rules of thumb that we like to stick to that we think are good keys to thematic investing. The first is, we want to make sure that we have high conviction behind the themes we’re identifying. Do we believe that these are going to disrupt the global economy? We want to keep that bar very high because if you’re going to go through all the effort of identifying the companies that stand to benefit from that theme, you truly have to believe in the theme in the first place. A lot of the research that Pedro will be showing later today looks at areas like which parts of the economy are going to be disrupted by these themes. What’s the total addressable market? How much of that theme has already been expressed? All of that feeds into our conviction behind the themes that we’ll be talking about today.
The second aspect because we are an ETF issuer, we’re very focused on the investability. Can you actually get good exposure to these themes through publicly traded equities? That to launch an ETF you usually need 25 to 30 names in the funds publicly traded. We want those names to have good exposure to a theme. Not to be tangentially related, but to really provide a substantial amount of exposure through revenue or R&D or their assets into these specific themes.
Then lastly, we look at time horizon. We are not going to concern ourselves with shorter-term themes. I’ll talk about that in a minute, but we’re looking at long-term themes that are structural in nature. Those that are not likely to reverse any time soon. We talk about this a little bit more on this side when we discuss the difference between cyclical themes and structural themes. Cyclical themes tend to come and go. Rising interest rates, falling interest rates. We saw, just in the last two years how much there can be cyclicality in the interest rate world. Currencies, valuations, those can really fluctuate and are not ever intended to be one directional. They expect over time to mean-revert.
That flies in comparison to structural themes which follow that orange S-shape curve. Those are not mean-reverting. Technology doesn’t get better and then get worse. It only tends to improve overtime. That’s why many of our themes are technology-driven. Some can be more regulatory-driven. Some can be more consumer-driven. There’s a variety of major factors that can play into the structural nature of a theme, but when we’re looking at themes, we’re generally trying to identify those that are heading in one direction or towards one direction rather than fluttering back and forth. That is why we have not launched a trade war ETF. As we’ve seen over the last year, trade wars can intensify. They can cool down. That is what we would consider more of a cyclical theme than a structural one.
All of this really goes back to the diffusion of innovation theory which holds that there’s a series of phases that a theme or any disruptive new product or technology will go through before it is very broadly adopted. It follows that same S-shaped path that we saw on the last slide where very early on a new concept or a new technology takes a while to get ingrained into society. People are skeptical of it. Maybe it doesn’t work that well. Maybe it’s too expensive, but over time it starts to pass through these different stages where more and more people adopt that technology. The rate of the number of people adopting that technology can get very, very fast until the market is finally fully penetrated and it starts to tail off. That’s the general shape of how these new technologies or themes diffuse through the economy.
If you look at history, you see that the shape is actually very consistent across time whether you’re looking at the telephone, electricity, the refrigerator, clothes dryer, etc. The only thing that seems to have really changed over the last few years is not the fact that these new technologies follow that S-shaped adoption curve, but that the slope of those S’s has gotten steeper. That new technologies are being adopted faster than ever before. If we compare things like electricity to the internet, there’s rapid adoption compared to the past. That’s why we think this is a very interesting time and a very interesting inflection point for a lot of these themes as they begin to become more adopted into society.
For just a little bit of context, we provided some stats here on where certain themes lie on the adoption curve. Many that we think might be more adopted than we previously thought are actually probably earlier if you look at the prevalence of smart home speakers or smart watches or electric vehicles. We can see that they’re still very early on in the adoption curve and that huge swaths of the population have not adopted these technologies yet.
Again, why now? Why are we so interested in thematic investing today? If we look really sector by sector, we see various disruptive forces that are beginning to change the complexion of those sectors. Now, as I mentioned in thematic investing, we are sector agnostic. If we’re looking at something like fintech, we don’t care if those companies are classified as a financial firm or a technology firm or something else, but we do know that fintech as a theme is most likely to disrupt the financial services sector. When we match up some of these themes to the sectors they’re disrupting, we see just how much turmoil some of these disruptive forces can create.
For example, if we look at the consumer discretionary space, we see how the rise of the millennial generation and their spending patterns and their inheritance and their rising wealth is going to very much change how retail operates with millennials. How they sell goods and services. That coincidentally also pairs well with ecommerce and the rise of how people are interacting with the retail segment online rather than in person. Similarly, if we look at the energy sector, we have a sector that formally was very much built off of fossil fuels, but we see huge investments in the electric and autonomous vehicle space which is very quickly changing maybe how people are going to get around in terms of what form of energy they use and what those transports actually look like.
If we go sector by sector, we can look at healthcare and the rise of health and wellness and genomics. We can look at industrials and the rise of robotics and AI and automation. We see that various sectors have a lot of disruptive risk right now. There could be a lot that happens over the next one, three, five years that are going to very much change the complexion of these sectors. We think if one is just looking at the traditional GICS sectors that they’re probably not going to capture all this disruption. That a lot of the weight in those old sectors is open towards old winners, not the new winners. Those new winners might come from completely different areas. Maybe not even the sector that they’re going to be disrupting.
A couple more slides before I turn it over to Pedro, but I did want to share a few notes on the thematic space overall. Thematic investing is not new. This has been around for a while. The newer aspect is the rise of thematic investing within the ETF structure. ETFs make it much easier to access these thematic ideas than someone who has to do the research on their own to identify these stocks with exposure to themes. To transact in foreign countries where many of these stocks are listed. You can see the grey line shows the sharp rise of the number of thematic ETFs since 2015. We’re now at about 119 thematic ETFs. You can also see the rise in assets tracking these ETFs which has risen from about five billion to about 25 billion over the last few years. Thematic investing continues to grow in prevalence and is increasingly incorporated in investor’s portfolios.
Now we also spent a lot of time over the last few months and quarters working on a thematic classification system. Because there are so many ETFs that are now out there, we realize that there needed to be more thought around how to make sense of what is a thematic ETF and what themes are they targeting. We created the classification system that you see here. This comes out in our quarterly thematic ETF report. If you want to track new thematic launches, closures, AUM, flows, where we’re seeing a lot of interest. That will all be in our thematic ETF report going forward.
To talk more about the space, I will hand it over to my colleague, Pedro, to walk through some of the major trends that we’re seeing in cannabis.
Pedro Palandrani: Thanks, Jay. Good afternoon everyone. Yeah. No one know at this point I would say when will a full legalization happen in the United States. Certainly, with Canada having legalized cannabis in 2018 and Mexico likely doing the same in 2020, being prohibitionist, it could prove to be very challenging in the US, but we recently launched the Global X Cannabis ETF, POTX or POTX and we have seen a lot of interest in the cannabis space. As you may know, cannabis is still illegal at a federal level here in the United States, but the market is unequivocally a very large market that goes well beyond its recreational aspect.
One of the things that is very important to understand is that, the global legal market is still only 8% to 9% of the overall current total addressable market. We’ll talk more about that in a second. If we understand this, we can see that the legalization factor is a key driver of growth here. As dollars transition from the illicit channels to legal and regulated channels, the pie will grow bigger for companies in the space. Regulations can change quickly and it all points out to policies at a state level and potentially at a federal level here in the United States and also around the world like the example of Mexico probably doing it in 2020.
This will certainly be quite different with other technology-related themes where regulations have little to no impact. Probably, just until recent years, but in the cannabis space, regulations have huge implications. It’s quite important for investors to understand them. Here in the United States, as you can see in the map, only 11 states have legalized recreational cannabis, but other states like Arizona, Florida, and even New York are planning to introduce a rec legalization in their upcoming ballots. The rationale behind a legalization can be seen from the lenses of potential economic impact that cannabis can have on the states and countries.
For example, we look at Colorado and the impact in the state since cannabis was legalized in 2014, we found out that 18,000 direct shops were created and over $1 billion in sale tax revenue has been raised. This certainly creates an incentive for states and even more if we factor in the slow down in the economy. Cannabis could be even considered a resilient theme given the incentives that states could increasingly have if recession risks increase. We also look at consumer preferences and how these have been evolving certainly favoring more consumption of cannabis and therefore increasing the demand of cannabis as well. About 62% of Americans supported recreational cannabis legalization back in 2018. We could certainly see that the 2020 presidential candidates potentially talk more about their cannabis legalization plans next year as we get closer to the presidential election.
We have also a look at Canada which has emerged as the epicenter of the global cannabis industry being the first G7 country in fully legalizing cannabis. Canadian companies have continued to build up their inventories more so ahead of the rollout of Cannabis 2.0. Sales of cannabis in Canada are trending in the right direction as you can see from this chart. This is only for rec 1.0 which is basically dried flower in all cannabis, but Cannabis 2.0 will be a key driver of growth in 2020 for Canadian LPs.
Cannabis 2.0 basically is referred as they rollout from Health Canada which is the governing body overseeing cannabis in the country to basically start accepting applications from cannabis companies to introduce cannabis derived products like beverages, edibles, vapes and a few others. The applications actually started a few weeks ago on October 17th and they serve us a 60 days’ notice to Health Canada about the new product. In mid-December, Canadians will have access to hundreds of products including CBD-infused spring water, mints, chocolates, pens and vapes and many other products.
Certainly, this is going to be quite important to follow for the last two weeks of Q4 and more likely Q1 2020. We could see a boost in sales from this Cannabis 2.0 rollout. In fact, if you look at other places where it has been illegal to rollout these beverages, edibles and vapes, all these new products account for 50% to 60% of the total market.2
As mentioned before, the cannabis market is a very big one. It is also a proven market given that cannabis sales through illicit channels have been around for decades. Today, only about 8% to 9% of cannabis sales go through illegal channels certainly leaving a huge opportunity to be disrupted by legalization. This 8% to 9% is an estimate of the $160 billion market. It is important to understand that cannabis goes well beyond it’s recreational use. The medical and certainly the health and wellness aspect as well are very important more so considering the CBD implications.
Like I say, medical cannabis is a nascent market where the majority of progress today is being made in the labs with many pharmaceutical firms conducting clinical trials to evaluate cannabinoid therapies for various diseases, a large number of diseases. These are trials that are on stage two and stage three as you can see in this chart. What we’re seeing is that the breadth of potential indications include neurological, immune, pain and sleep, and many other areas. It is in such early stages that only one cannabis-derived drug has been approved by the FDA. The list of companies doing research of cannabinoids to treat some of the indications that I just mentioned is quite large. Medical cannabis is just scratching the surface we believe and certainly, the companies in the space will have to comply with the FDA regulations which by the way is working towards a new set of guidelines for medical cannabis.
We recently launched a POTX or Cannabis ETF which certainly features targeted exposure to the cannabis industry. We have a very rigorous process meaning that companies have to derive over 50% of the revenue from the cannabis value chain. We’re not extending too far in the value chain into tangential companies to the space like alcohol companies for example. We’re getting exposure to this cannabis companies via passive product and we feel this is important because, like I say, this is a nascent industry certainly with inherent volatility. With a passive product that implements a market cap weighting scheme, we’re basically allowing market dynamics to dictate which companies should have a higher or lower weighting in our ETF.
Another important aspect is that POTX is designed with institutional quality in mind. We’re including additional guardrails such as using established service providers and requiring ongoing checks in an effort to ensure holdings meet the local laws and regulations that govern them. With that, we’ll switch gears to video games and esports.
What is super interesting and transformative about the industry is that it has often been stereotyped as a niche market for young people, but the video game industry has leveled up to become a global entertainment powerhouse. Actually, if you look at analyst estimates, the global revenues in 2018 were nearly $140 billion. This is far more than the global box office revenue for movies and film industry which was about $42 billion.
This is another huge market that is in the middle of transformation with huge new revenue opportunities for companies in the space that we’ll talk about here today. As you can see from this chart, young gamers, those between 18 to 25 years old, watch other play video games for almost four hours in average per week. This is more than watching traditional sports, and again, not even counting the time they spend playing themselves video games. This has certainly resulted from a significant cultural shift basically from a play alone, play at home activity to more like a group play, play anywhere culture where people can play with their family, their friends all around the world. They can compete against each other or play together as a team. This has become the new social media outlet for many people. Certainly, it’s something that we couldn’t see before in the video game industry.
If you look at the number of gamers, we can have an idea of how the industry has been changing. In the mid ‘90s, there were about 100 million gamers. Today, gamers total more than two billion around the world. This is often overlooked, but certainly is key to understand. It gives you an idea of the magnitude of the size of the market. Traditionally, the video game industry offer a little opportunity for recurrent revenue and the game publishers and game developers had large upfront cost associated with launching a new game. This model has been changing completely. What we’re seeing is that, digitalization as in many other industries is taking over gaming. In fact, in 2018, 83% of all video games were sold in digital form. That’s a staggering increase from only 20% 10 years ago. You can think of – this is similar to downloading a movie on Apple TV, so very easy to access and also very easy to deliver for a game publisher.
The other key trend that we’re seeing is the introduction of free-to-play games where basically game developers deliver the games for free, but they often sell add-ons such as additional levels, new characters and skins or enhance weapons. You can think of Fortnite for example where people literally even buy dancing moves to celebrate their victory. These add-ons cost virtually nothing to produce, but certainly can generate a steady stream of additional revenue for games. Here we can see that roughly 90% of today’s gamers are mobile, but if you look from a revenue perspective, the money is still predominantly in the PC and console formats with about 55% share of total revenue. If we look at where the revenue is coming from, we can see that in 2019, the US actually surpassed China as the largest gaming market in the world.
Gaming is a global, but still fragmented market with many companies providing good exposure. To an industry like I just explained is undergoing a significant transformation and we believe this is a unique opportunity for investors to capitalize on new growth opportunities available in this quite huge market. Two other phenomena are adding new revenue streams in the video game ecosystem. The first one is live streaming where viewers pay subscription fees to watch their favorite gamers play a game.
Basically, in this case, viewers can subscribe to their favorite gamers and that allows them to watch their daily streams and also to chat with other fans. Usually, a monthly subscription to one of these streaming platforms can cost about $5 or more and fans also donate an average of $29 per month to their favorite gamers to basically support their streaming or to get a specific question answered. As a business model, the live stream platform keeps 50% of the consumer subscription fees and add revenue as well but the other 50% certainly goes to the gamers who also get paid by sponsors and by donations like I just mentioned.
The other new market and trend is esports which basically has professionalized the video game industry by creating a team of gamers who compete in tournaments that are broadcast around the world. The esports audience is expected to reach 443 million viewers this year. This is up 12% from 2018. If we look at the business model of these companies, esports companies can generate revenue just as any other traditional sports company. This is via sponsorships in advertising, merchandise sales and subscription. What a large industry with improving business models and certainly creating new opportunities for investors in this industry.
Today, every move we make leaves behind a digital trail. You can think of a payment, likes on social media, online searches, and even a geolocation with your smartphones, just to name a few examples. These are millions of megabytes of data every single day. More data has translated in more cyber threats, but at the same time, this has increased the need for companies and organizations around the world including government bodies to increase their spending in cybersecurity.
Previously, cybercrime focused on stealing data, intellectual property, money, and certainly, more recently even crypto currencies. Today, cyber threats are increasingly complex with technology evolving to the internet of things, 5G and cloud computing. Unfortunately, these new technologies as well will open the door for new type of crimes and it may sound futuristic, but next generation of crimes could involve manipulating traffic light signals or even in the worst case, someone’s implantable cardiac device. This will enhanced cybersecurity platforms. Today, we’re seeing cloud native AI-based cybersecurity systems that are not only reactive to a cyber attack, but certainly offer a huge level of proactivity and learning in seeking to prevent these attacks.
Typically, as we can see in this chart, external actors have been behind cyber crimes, but internal breaches occur as well. Mostly or most of the times committed for a personal/financial gain and sometimes simply as a result of a human error. Cyber attacks have become extremely costly for companies so further spending in cybersecurity has become totally justifiable. In some cases, a cyber attack could even put out of business a small and medium size company. We’re saying that even the smallest companies invest heavily in cybersecurity. As a result, cybersecurity is one of the fastest growing segments of IT spending, not only here in the United States, but also around the world. Chief Investment Officers continue to rank cybersecurity as the top spending priority.
Total global spending on security-related software, hardware and services are expected to reach 124 billion by year end. Certainly, as the number of malicious programs also reach record heights, but spending is just expected to increase. By 2022, the global spending could reach $170 billion. Likewise, government spending on cybersecurity implementation has continued to grow and more revelations are pushing for greater cybersecurity spending. You can look at the EU, General Data Protection Regulation or better known as GDPR, which went into effect in May of last year. GDPR is basically calling for personal data to be processed in a manner that ensures security, protection and transparency. Regulations will continue to be a key-driver behind this greater cybersecurity spend that we’re seeing. That we will continue to see in the next years. With that, I’ll turn it over to Jay for the final part of our webinar and then we’ll open it up for Q&A.
Jay Jacobs: Great. Thank you, Pedro. Clearly, we’ve talked about a few themes here today. At Global X we have a whole host of thematic ETFs, over 17 individual themes and one theme-of-themes approach that I’ll talk a little bit more about. Overall, we obviously see a proliferation of thematic investing. For many investors, they like having these options available to them to be able to target the specific themes that they see the most interest in, but we also realize that many investors might have trouble choosing between these themes. Which are the most powerful? Which are growing the most quickly? How do I put those in a portfolio?
As part of one of our recent launches in the thematic space, we did create our first fund of funds thematic ETF, which currently invests in seven different thematic ETFs of Global X. Trying to be that thematic solution so that someone can combine multiple themes and just trade one ticker getting those exposures simultaneously. Essentially, the way it works, we look at the universe of Global X ETFs. We assign each theme to the sector that it’s disrupting we it’s disrupting. As we talked about before, fintech disrupting financials with human battery tech disrupting energy and transports. Genomics, disrupting healthcare, etc.
The top theme from each sector in terms of past 12 months revenue growth is selected for the ETF. We took the weight towards the ETFs that have the highest trailing 12 months sales growth. The reason why we’re so focused on sales growth is if we go back to that idea of the adoption curve, you tend to see higher sales growth early on in that curve. We think that’s really the sweet spot for a lot of these themes. We want to capture them earlier rather than later and get exposure to those that are experiencing that rapid growth. As a theme starts to mature, it will actually start to – sales growth will fall. It’s waiting in the fund. It would eventually fall and at some point, could even come out of the fund.
If you look at the exposure currently, you can see the different themes that we have exposure to today. The biggest waiting right now is in our social media ETF which is experiencing very rapid revenue growth. There’s a lot of social media companies continue to grow and add revenue at a very rapid pace. You’ll notice that many of the themes we talked about today are not included in this thematic ETF as of right now. That’s not because their sales growth is not high enough for anything like that. It actually just has to do with the methodology of the fund. That looked at funds that were live as of a few months ago. The cybersecurity and esports and cannabis funds were not live when the methodology selected these. Those will not be eligible until the next rebalance.
Looking at how does thematic investment fit in a portfolio? This is a question we get quite frequently as the themes do not fit traditional sector classifications or country classifications. We find that one of the best ways to think about it is really as a satellite position to compliment the core portion of one’s portfolio. As one builds out a core with a suite of ETFs or mutual funds that probably focus on bigger, broader, building blocks that might be organized by region or country. We think that’s still a fine approach, but to carve out a thematic sand box or an opportunistic sandbox which in a 60-40 portfolio, it could be roughly 10%.
That’s where investors would expect, more tracking error. Wider differences between sector exposures and the benchmark. More volatility, but that bucket would be designed to be much longer-term buy and hold for these thematic growth opportunities. That’s the way we see it fitting into the portfolio. Of course, we think, if you are going to peel off %5 to 10% of a portfolio for thematic investing. That it does make sense to get some diversification across themes. That these are more targeted exposures and can be a bit more volatile. Getting exposure to a few different things. Themes can help diversify the thematic specific risk.
We also often get the question about how does value thematic companies or themes overall? We did recently put out a research report on this which is included in our thematic white paper. There’s a few key takeaways from this. The first is, we do not think looking at price to earnings makes a lot of sense in the thematic space because a lot of these companies are still very fast growth and are not trying to generate earnings. Think about Amazon for example. As big as they are, are still not an earnings focused company. They are focused on growth. They are reinvesting a lot of their cash flow into growing other sides of the business. We see that across a lot of these themes.
For example, you can look at the genomic space. A lot of these biotech companies are even pre-revenue. They’re developing a drug. The drug is awaiting approval. They will not get any revenue and certainly not any earnings until the FDA approves their drug. Looking at a company like that on a P/E basis makes very little sense. Our preference is to look at price-to-sales. Again, following that sales-based approach. Sales is a number that’s not as manipulated in accounting and it can give a good indication if you look at multiple time periods of, is this a technology that is continuing to build its adoption over time? How early is it in its adoption?
We like to look at price-to-sales. We also like to look at growth expectations. How is that price-to-sales going to evolve overtime? All else equal, if you’re in a very high growth theme you’d be willing to pay a higher price-to-sales for that growth. We’ve essentially created a ratio, price-to-sales to growth which is somewhat similar to the PEG ratio which is price-to-earnings-to-growth, which looks at how much are you paying in a price-to-sales basis per unit of growth? What we find here is, there’s certainly a range in that fourth column in the table over. We can actually see that of these themes are priced more attractively than the S&P 500 when you consider both the price-to-sales valuations and how much quicker they are expected to grow over the S&P 500.
Last before we do our last poll question and then Q&A, we always like to end by talking about when themes converge. We’ve talked about a handful of themes today. There’s many more themes out there that we didn’t discuss, but will be discussed on a future webinar. All of these themes are interconnected. The rise of cyber security as Pedro was talking about is because of the rise of big data and analytics which is also happening because of the internet of things which is connecting more devices to the internet to collect that data. Which is being powered by video games and esports which is one of those internet connected devices that people are using for entertainment.
You can go on and on and you can see that many of these themes are connected through different channels and powering each other forward. We think this makes thematic investing only that much stronger that these themes are not happening in isolation. That if one area of the thematic map is growing rapidly that it can help propel growth in other areas as well. We think this is always a fun way to look at the thematic space, to realize that these are not themes happening in isolation.
With that, we can go ahead and get into Q&A. Our first question, we’ll just jump in here. What have been the drivers of correction in the cannabis space and are you still bullish on the theme?
Pedro Palandrani: Yeah, good question. Certainly, there are a few factors but I guess that the one where investors have been focused the most is some of the apparent over supply of cannabis with inventories that continues to grow faster in sales in Canada. It is very important to understand that cannabis was just legalized over a year ago and there hasn’t been a huge rollout of dispensaries in provinces like Ontario for example which is the largest province in Canada. Many dispensaries are still trying to get their license, but it’s not happening quite so fast. Up until December, January of this year, Ontario had no stores. Today, there are about 24 stores in that province.
In fact, in Ontario, there are only two dispensaries open for every one million people. This compares to a place like Colorado with 96 dispensaries for every one million people.
Jay Jacobs: Great. Thank you, Pedro. The next question, which sector do you see the most ready for adoption of disruptive technology over the next few years? Which is likely to be the most disruptive? I’ll answer first and Pedro, you can go next. I think the energy and transportation space is probably the most right for just wholesale disruption. You have about 80 million cars per year being sold. Hundreds of millions of cars on the road, all running on gasoline. You have trucks. You have cargo ships. You have planes. All running on largely petroleum and you just see this massive shift into lithium and electric vehicles because of better batteries that are lasting longer, that are becoming cheaper.
I think that’s going to have a lot upstream and downstream effects as well. The vehicles themselves will change. The infrastructure on how to charge those vehicles will be very different because the gas station model doesn’t really work if you have to charge your car over a longer time frame. The power that’s being supplied to those cars is going to have to change because current electric systems can’t handle that kind of draw from their systems every single day. Of course, how people use those cars. How people think about mobility, car ownership.
I think that’s all going to change a lot as well with a very different kind of vehicle. That’s a sector that I just think is very directly in the crosshairs of a very disruptive technology. Where some of our themes are more the next evolution of a current sector. If we look at the internet of things really being the evolution of the IT sector being something that was primarily desktop based and server based then going into our pockets and our homes and our cars in every aspect of our lives. That’s the one I would pick. Pedro, what do you think?
Pedro Palandrani: Yeah, I think that the industrial sector is another one that will face significant disruption in the next few years. If you look at aging populations around the world, rising wages and companies seeking to increase its productivity, the need for robotics and artificial intelligence, it continues to grow significantly. I think the robotics and the AI theme is another one that will continue to show a significant role. When you look at robotics, it’s not only in the industrial segment, but also in the non-industrial segment in sectors such as healthcare or agriculture.
Jay Jacobs: All right. The next question is, what are your thoughts on active versus passive fund management of thematic ETFs? This is a great question. We’ve looked into this a lot and I think there’s a few factors at play here. One is for some of these themes where there are 25 to 30 companies that are publicly traded that have good exposure to the theme. It is very indexable. You can run a passive ETF, getting very good exposure to that theme. Oftentimes, there is not an existing index off the shelf, but it’s not like just getting the S&P 500. There isn’t an S&P 500 of cloud computing for example.
The team at Global X spends anywhere from six to nine months developing a custom index with an index provider to really target those companies that are well positioned to benefit from the rise of that theme. It is something that is very doable in indexing form. We think getting broad exposure to the whole space is really the best way to play it as those industry dynamics start to take hold. We’re certainly advocates for the passive approach in looking at these more established themes where you can get that 25 to 30 name exposure.
Now I think it would be one more question as we’re coming up on time. How does ESG fit into your thematic approach? That’s a really good question. As we define thematic investing, we do not include ESG ETFs as thematic ETFs. We think those fall under a different category that you could call values-based investing. There’s not a hard wall dividing the two of them because I’ll give an example. Lithium and battery technology, one of our ETFs is providing exposure to the rise of electric vehicles. That certainly hits in the E category of the ESG when you think about environmental. That fund was not constructed as being an ESG fund in mind but it happens to be one because it’s providing exposure to companies that are really probably going to change the environmental landscape through electric vehicle technologies.
You can probably go through the list and point out of few others that are going to have positive environmental impact or social impacts, but that’s not the primary objective of thematic investing. As I mentioned before, it’s really focused on looking at high growth opportunities around the world across a variety of sectors and geographies. Before we say goodbye, we’ll just briefly share our disclosures here. I do want to thank everyone for joining the webinar today. If you’re interested in what you saw here, please do download some of the link materials that you see on your dashboard. Also, please feel free to visit our website at globalxfunds.com/research. Thanks everyone for joining and hope to speak again soon.