The coronavirus pandemic has changed the world. But it has also accelerated certain technological trends that investors should be tapped into. From automation to genomics, these advancements are here to stay and there are many growth stocks that are just getting started.
ProShares' Executive Director of Thematic Investing Scott Helfstein sat down with The Motley Fool to dive into some of the intriguing stocks in their new ETF: ProShares MSCI Transformational Changes ETF (ANEW 1.57%). He shared plenty of tips that all kinds of investors can apply to their own portfolios.
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Corinne Cardina: Hi, everybody. I am Corinne Cardina. I'm the Bureau Chief of Healthcare and Cannabis on fool.com. Before we get started, I'd like our viewers to know we're using a question and answer service called Slido. You can open that up in your browser. There's also an app. Our code is MFLive. You can submit questions, upvote other people's questions for the ones you want to see answered. I'm so excited to welcome Scott Helfstein, like I just said, Executive Director, Thematic Investing at ProShares. Hi, Scott, how are you?
Scott Helfstein: Hey, Corinne. I'm well. How are you?
Cardina: I'm good. Fools, for the next 30 minutes we are going to talk about ProShares' new ETF. It is called ANEW. I'm going to drop the ticker in the chat, and it tackles four transformational changes that are being accelerated by COVID-19. Scott, can you give us the highlights of what those four transformational changes are?
Helfstein: Sure. It really has to do with how we've spent our time and our lives have changed over the months of the pandemic, and if we think about the hours of our day, if we're fortunate enough, we work, we try and to take care of ourselves. The way we consume has changed, the way we connect has changed. How many of us had FaceTime or Facebook (META 3.70%) apps open at holiday tables at some point in the last nine months? So really, what we wanted to do was put together a set of companies that really spoke to how our lives have changed, but more importantly, how those changes were already in place and were accelerating. Really, there's four of them that we focused on. The first is the future of work. So we have, for example, things like video conference, but we're also focused on how the changes in remote have facilitated things like automation and the automation revolution. We have genomics and telehealth, which many of us have now actually had a Teladoc (TDOC -0.87%) appointment at some point over the last few months. The number of people that use the services is up something like four or five times what it was last year, and now we're getting news about vaccines where messenger RNA in genomics really play a prominent role. The third area is digital consumer and that gets to social media streaming, gaming, and the explosion of e-sports throughout the pandemic. Then the fourth is food revolution, which is one that we think is a little different and people perhaps don't hear as much about. But we saw beef prices go through the sky and it was the largest increase prices the USDA had ever recorded back when we were seeing the shutdowns and trying to ensure the supply chain. If we actually step back, there is a really interesting story to tell about innovation in the food space that we think investors should be paying attention to.
Cardina: Absolutely. We're going to talk about all these different trends. We're going to dive into some of the specific stocks that the ETF holds within the category and chat about why these trends are likely to endure beyond the pandemic. Before we jump into all that though, we've had exciting vaccine news this morning. So I don't want to ignore that. I think my question for you is, was this ETF designed for this current new normal? How do you think these trends are going to endure once a large segment of the population does become vaccinated? Some of these things may not be exactly where they are today, how do you picture this on the longer time horizon?
Helfstein: Let me stress, first of all, I look forward to the day when we get a vaccine. I'm a proud New Yorker and we were out at a restaurant that was near empty last night and look forward to the days where the economy reopens. This is not a COVID doom and gloom type of a fund, but many of the things that have happened are likely to stay with us. For example, we saw the number of people working from home, the percentage of the population increase from 7% to 42%. That's a six-fold increase. We cannot, by the way, have another six-fold increase. We can't have 252% of people working from home. We can't do that and we might have peaked at 42 or 49.There are some different statistics that are out there and that might well start to revert as offices reopen, and we would expect that to be the case. Yet, more than 50% of senior executives are talking about making some flexible work schedule permanent and so people are not in the office five days a week, and a recent Cisco (CSCO 1.69%) poll, 53% of senior executives said that they were looking at reducing their office space. Even a 20% reduction in office space could be somewhere in the neighborhood of 500 billion to a trillion dollars of cost savings that will probably be redirected to things like customer relationship management software, artificial intelligence, automation, video conference. We don't necessarily see many of these changes as receding. We think that there will be a permanent part of the landscape and really what we're focused on is where do we go over the next 10 years? Not the next 10 months.
Cardina: Absolutely. I think we've gotten a taste of a lot of these things because of the circumstances, but something like telework, I've realized that my job can be done 100% remote. Something like telehealth, once you have been able to log onto a video and see your doctor from your couch, that may be something you're interested in doing even when there's not a pandemic just because you've experienced the convenience. I definitely see where you're going with that.
Helfstein: Similarly across all these areas, another one is online retail and I imagine we'll want to jump into some of the names there, but we saw e-commerce as a percentage total retail sales go from 11%to 16%, and new numbers should be out at some point this week. But to give everybody context, it took 10 years to go from 5% to 11%. It took a decade to reach 11% penetration. Ten years. So for all the people who think that Amazon is taking over everything, all of e-commerce is still only 16% of the pie. That doesn't suggest to me that all of a sudden, it's going to go back to 11. There's a whole lot more that it's going to capture and so it's just going to expand, not recede.
Cardina: Absolutely. All right. I have some questions for you about the ETF and how it was designed, and then we'll get into some of these juicy stock names. My first question is, how do you expect this ETF to behave? How might it compare to the broader market in terms of volatility?
Helfstein: So when you look at the NASDAQ, for example, 85% of the NASDAQ weight is in technology, consumer discretionary, and communication services. Certainly, as we think about things like future of work, a lot of those elements play in similarly on the discretionary with the digital consumer. Nonetheless, when you add in food and you add in genomics and telehealth, that has a little bit more of a staples traditional defense quality to it. What we've done is we have weighted each of the four themes equally. Twice a year, we'll reconstitute to 25% per theme, and so we think that that's a way to balance. While I can't say I would expect it to be necessarily more or less volatile than a broad index, it has elements of diversification with 143 names currently in the basket, that is, I think a little bit more balanced is the right way to phrase it.
Cardina: Absolutely. What type of investor might consider this kind of ETF? Would you say this is good for someone who's looking for growth, value, diversification? Any thoughts there?
Helfstein: I think it first and foremost falls into the growth category. We really focused on areas where there is an increasing size of the pie, if you will. For example, if you're talking about something like industrial automation, U.S., Europe, China, and Japan will have, based on current worker utilization rates, 125 million shortfall of workers by 2040. If one robot can do the job of four workers, we need 31 million industrial and commercial robots, and there's three million in the world today. Those are the types of things that we're looking at, where the pie is expanding. First and foremost, investors focused on growth should think about this. Our overarching theme here is one of transformational change. For us, those are rapid, high in magnitude, and things that are very hard to reverse out of, turn back the clock. Really anybody looking for a growth sleeve and we think actually that this could fall into someone's core portfolio, within their equity sleeve as their growth alternative. Perhaps different than a Russell Growth Index that's a little bit more focused. Also people who take a core-satellite approach, this is a reasonable, dramatic satellite.
Cardina: Great. Let's talk about time periods. At the Fool, we are really long-term investors. When we're looking at the shorter side of things, we're looking at three years to five years. What would you say is the ideal time period that an investor should aim to keep their money in this ETF to experience gains?
Helfstein: We think about it the same way as you guys do when it comes to our thematic baskets. For us, when we say theme, there's really three things that we tend to focus on. One is technological innovation. The second is demographic shift. The third is changing consumer behavior. Really this captures all of it. What we've seen in the last 10 months is that so many of these changes have just been accelerated so much faster than anybody believed possible. We're seeing these changes play out in a way that was really unimaginable, and yet, it still doesn't stop the fact that these are three years, five years, seven years, 10 years, in some cases, multi-decade themes. Food revolution and sustainable food with two billion more people according to UN projections by 2050. There's 177,000 new mouths to feed every day for the next 30 years. That is not a short-term trend. That is something that we are going to be grappling with and we're going to need to bring innovation to bear, in order to handle those. For us, this is a very long-term investment.
Cardina: Great, that's very helpful. Let's dive in to each of these four categories. I think we're going to start with the future of work. Cybersecurity and automation are two trends that I think are top of mind. What can you tell us about these and which stocks in the ETF especially encapsulate these two trends, cybersecurity and automation?
Helfstein: Cybersecurity we feel as well is a really important theme. It's actually one in dissecting and doing some work for an outlook that we'll be producing early next month. Cybersecurity is actually one of the themes where the earnings increase of this year has pretty much explained the entirety of the gains. We have not seen multiples expand in cybersecurity the way that they have in some of the other areas. There is actually one of those areas where it's high-growth and still value. We have a number of names in that area. Companies like FireEye (MNDT), that deliver cloud-based solutions. A company like Zscaler (ZS 3.10%) that provides the secure tunnel that people are using to get into their work networks when working remotely. Those are just a few. For example, Zscaler's earnings this year are up 40%. Their revenues are up 40%. We're seeing really strong growth in these areas as companies try and figure out how to get people working remotely and safely and protect their computer networks. That's something that I think will just be a permanent part of the landscape going forward. When we think about automation, an interesting name there is Cognex (CGNX 2.07%), which does censor technology. That's one of those areas. I discussed the disruption, for example, to meet supply. We can certainly see in the future that one approach to grappling with that is increased automation. We know we're going to need more industrial and commercial robots. We know that there is a worker shortfall in the four largest economies. That's an area that we think is really right. For example, McDonald's (MCD 0.18%), which is not in our food revolution basket, but McDonald's has a fully automated test kitchen in Arizona, where there is nobody who actually prepares your food, it is all done by a robot. Those are some of the innovations. For us, automation plays in in future of work, but really, automation and artificial intelligence cut across many of the things that we're talking about here.
Cardina: Awesome. There are also a couple of more traditional tech stocks in the future of work part of the basket. Adobe (ADBE 5.95%), I think a lot of people, what comes to mind is Photoshop, Illustrator, InDesign. Microsoft (MSFT 2.14%) people tend to think about their Office Suite, and Windows. What are some of the ways that these older tech companies are really transforming and how the pandemic has spurred that along?
Helfstein: Microsoft is a juggernaut. It's one that's hard for people to wrap their brain around, because it is so prominent. We work with the Office Suite, and Word, Excel, and our operating system. But they've taken a lot of their revenue into the cloud with subscription service. We see that cloud and productivity tools make up about two-thirds. It's really interesting that you talk about Microsoft and Adobe because they've actually announced a partnership a little while ago to take on customer relationship management. So CRM is a new segment, the two of them working in conjunction. By the way, Microsoft, as I think you were implying, also has a big gaming division with Xbox. As we think about virtualizing work, it's a little crazy to think about this. But what about the virtual reality coffee break? Or the virtual reality water cooler? There are some companies that are uniquely positioned to be able to facilitate a new and different remote working environment. Microsoft I think is one that investors should continue to pay attention to. Really important from a productivity standpoint, and Adobe as well. My 11-year-old wanted a subscription to Illustrator for his birthday this year. They are not just talking about PDFs, but they are important in secure document management. However, we've got Photoshop, we've got Illustrator, they also have an artificial intelligence product called Sensei, which actually helps people to do their graphic and document management. They're on the cutting edge of artificial intelligence and machine learning in the documents space as well.
Cardina: Awesome. We're seeing some of these older companies get involved, maybe disrupting something like Salesforce (CRM 2.63%), maybe disrupting something like DocuSign (DOCU 3.11%). Do you see them going after those markets?
Helfstein: I suspect with time they will. But again, it's such a rapidly growing area. If we think about the revenue growth that Salesforce has experienced, and just the growth of the CRM sector, which quite frankly almost didn't exist in its modern form 10 years ago.
Helfstein: Whether we talk about something like CRM or we talk about cloud, these are all new areas. We're just at the beginning of these transformations. I would argue that what makes these companies really interesting is, you need them when times are good, and you still need them when times are bad. That whole notion of, we're going to have a reopening trade, and all the things that didn't do well are going to come back. That doesn't prevent these companies from still doing well. These companies had earnings, well, Microsoft grew their revenues by 18%. It's a multibillion dollar company that still managed to get double-digit growth over the past year. Even if that slows, and even if we do return to the office, we're still going to be using Teams and our collaborative tools. We need customer relationship management services when the economy is bad, because then it's all that more important to deliver what your clients need in a timely and efficient fashion. I think investors are a little bit prone to think about reversion to the mean, and to say that things can't stay this good for some of these companies. I think that that misses the fact that so many of these businesses didn't exist a decade ago.
Cardina: Definitely. Genomics and telehealth. I want to start with Intuitive Surgical (ISRG 1.03%) because this is a Fool favorite in the healthcare space. It's the company behind the da Vinci robotic surgical system. It helps surgeons perform minimally invasive procedures. It's got a nice installed base of systems, and enjoys a lot of competitive benefits. How do you envision the future of Intuitive Surgical?
Helfstein: You mentioned the importance of robots and while I'm not really a fan of not having a doctor in the room to operate on me, nonetheless, we have seen surgery, number of surgeries have come down during COVID. People are putting things off unless it is really a necessity. I think any ways we can deliver more efficient and safer healthcare outcomes is a pathway to the future and it's something that we should be excited about. When we think about something like surgical robots, there's a phenomenal barrier to entry there. You need to get people trained. They are expensive. It's not exactly the type of thing where a hospital is just going to hop off and go do something else. For a lot of reasons, we think that that's a growth opportunity. It speaks to remote, it speaks to artificial intelligence and automation, and so really encapsulates so much of what we're trying to talk about here.
Cardina: Definitely. So that we can get to all four, I'm just going to kind of speed through these digital consumers. Let's start with Amazon. (AMZN 4.44%) Amazon stock is up 1,700% in ten years. Beyond e-commerce, it's got a lot going for it, its biggest growth driver being Amazon Web Services, the cloud, of course. Do you think that Amazon can do anything near a repeat performance when we're looking ahead to the next decade? How do you envision this as an investment today?
Helfstein: That's where I get back to that 16%, that is the total e-commerce penetration of retail in America. We're still early on as much as it doesn't feel that way for a lot of people. There is a lot more to come. We're going to be doing more and more online. Even their roll out of the Amazon stores or their use of the Whole Foods brand in the food space, I think is all reflective of innovation. Certainly AWS has been a phenomenal success story for the company. I don't know about repeating past performance, but we do think that we're early in the digital consumer revolution still. So there's a lot more to come. We saw Amazon Prime Day had the largest sales on record. Alibaba (BABA 2.78%) just put out numbers last week from its Singles Day, which also showed phenomenally strong growth year-over-year. So there's more to come. Not only that, we also focus a lot on margins. You look at a company like Walmart (WMT 0.18%) that has successfully grown its e-commerce business, yet it's done so at the expense of margins. Whereas Amazon margins have consistently increased overtime. We think that that's a trend that they can continue. Some of those investments if they made a few years ago, for example, like their own delivery trucks has turned out to be a phenomenal advantage.
Cardina: Definitely. Another trend in the digital consumer is gaming. Scott, I am not a gamer. You're going to have to help me out with this one. We've got EA (EA 1.12%) and Activision (ATVI 1.97%) as some stocks of interest here. I'm assuming that gaming has enjoyed a lot of tailwinds with everyone being at home and not being able to socialize. What can you share about these two?
Helfstein: Just in April, gaming downloads, according to Apple (AAPL 1.41%), were up 30%. There are some numbers out there that are really pretty amazing, with regards to the number, not just of hours played but hours watched, literally 500 million people watch video games. In April, if we look at Twitch and YouTube gaming, which are the two biggest platforms, there were more than two billion hours of gaming watched during that time period, according to those companies' statistics. We also saw, during the pandemic, that Electronic Arts, which has the FIFA, the soccer or football franchise, if you will, they ran a competition that had almost 300,000 participants competing in a remote esports effort. Formula 1 actually put their drivers into simulators, and people were watching professional drivers in gaming simulators as the substitute for Formula 1, earlier this year. So this is a phenomenally big and growing market. I do believe that, yes, our spread gaming will probably revert a little bit as we reopen and we can do things like go to amusement parks. But, again, this is just the acceleration of a long-term trend. I mean, there's now something in the neighborhood of 100 universities that offer video gaming scholarships. These businesses will continue to see phenomenal growth over the next few years.
Cardina: Awesome. Jumping over to food revolution. Deere & Company (DE 0.66%) is not one that comes to mind for me right off the bat when I'm thinking about what I'm going to have for lunch, but maybe it should. How is Deere disrupting agriculture, farming? Why do you think that its stock is going to outperform and be helped by the tailwinds from the pandemic?
Helfstein: Well, I would pose a question that I think a lot of us don't think about, which is do we think it is easier to have a self-driving taxi operating in a downtown city or a self-driving tractor operating at a field?
Cardina: Going with a tractor.
Helfstein: As am I. Those are the types of things that investors should be thinking about, it's how all these technological innovations in one area are moving into another. When we think about, and by the way, why does the tractor only have to till the land? Why doesn't it have robotic arms in order to actually pick and store vegetables? So much of that is done by machine already and we're taking it to another level, for example, the use of drones; farmers using drones because a drone can evaluate things like oxygen level or chloroplast count in a way that walking through a field you would never see. If you have part of your crop that is getting sick or that is underdeveloped, you have a much higher likelihood of being able to use sensors from the sky. There is so much technology that is going to be brought to bear in food. Deere, for example, with something like the automated tractor will be a leading position. They already have the incumbency in terms of the relationships and they are investing to bring the technology to the customer.
Cardina: I can say that I have definitely learned a lot from you today, Scott. I appreciate you sharing all these insights with us and we will keep in touch. Good luck with your new ETF and have a great afternoon.
Helfstein: Thanks. You too, Corinne.