This Or That: ETF Themes Edition #NewsETFs

You have probably seen This or That games across social media. This is a just-for-fun version for ETF fans that covers some of the biggest themes among equity ETFs. These themes are posed next to each other. It is up to you to decide whether you like one or the other (or both). I offer a range of interesting options in this note. But these ETFs all share in common a connection to emerging trends, shifts in behavior, and the latest investment themes.

This or That: Work From Home or Play From Home?

The worldwide pandemic may have triggered many of us to stay at home, but digital innovation has kept us there. Technology has increased our ability to communicate and interact with each other without having to leave the home. This falls into to two separate but related trends: work from home and play from home.

• Work from home: Many Americans have returned back to the office. Yet a large portion of workers are still remote or hybrid. According to August 2024 data from the BLS, one in five workers spend at least some time teleworking. This increases to two in five workers for those with a bachelor’s degree or higher (i.e., mostly office workers). To capture that trend – which included countless hours on Zoom Video (ZM) – work from home ETFs emerged, sharing many similarities to cloud computing ETFs. The Direxion Work From Home ETF (WFH) includes companies within cloud technologies, cybersecurity, online project and document management, and remote communications. These trends are not limited to telework. But they also apply to an increasingly global workplace where employees work daily with colleagues in other cities and countries. A competitor, the iShares Virtual Work and Life Multisector ETF (IWFH), was shut down in August.
• Play from home: On the other hand, some of the same technology that has enabled us to work from home has also powered us to “press play” from home. It is potentially a stickier trend that has arisen from convenience, cost-efficiency, and a shift toward freedom of choice in entertainment. Streaming channels have consistently taken share from movie theatres and cable/broadcast television over the past few years. According to data from Nielsen, Americans spend over 40% of their TV viewing on streaming video. This trend doesn’t just stop at videos – consumers have also taken their video game and music collection online. For broad streaming ETFs, there are a few options beyond traditional communications sector ETFs including the Invesco Next Gen Media and Gaming ETF (GGME), which includes streaming networks like Netflix (NFLX), audio streaming like Spotify Technology (SPOT), and video gaming stocks like Nintendo Co (7974 JP) (OTCPK:NTDOY). Peer ETFs include the First Trust S-Network Streaming and Gaming ETF (BNGE) and the ProShares On-Demand ETF (OND), which similarly hold internet and app-based next-gen media stocks.

This or That: Online Shop or Airline Hop?

Strength in consumer spending has lasted longer than expected despite an uncertain environment. But now there is no doubt that consumer wallets are thinner. Personal savings rate has fallen to record lows – only 2.9% during July. For reference, the savings rate was 7.4% pre pandemic in 2019 and 4.5% in 2023. With limited funds, the question becomes, how will consumers spend their discretionary money – on goods or services?

• Online shop: Overall, retailers are moving toward online shopping experiences. That doesn’t mean fully transforming from brick-and-mortar, but instead using the two as complementary strategies. This has built in strength into the retail sector as traditional retailers like Walmart (WMT) use e-commerce technology to gain efficiency and modernize current operations. According to the U.S. Census Bureau, e-commerce sales in 2Q24 were 16% of total retail sales – up from 15.3% in 2Q23. Investors have several options to access e-commerce retail trends outside of traditional consumer discretionary sector ETFs. The largest ETF by assets in this space is the Amplify Online Retail ETF (IBUY), which focuses on companies with significant revenue from traditional online retail, online travel, online marketplace, and omni channel retail. These holdings are weighted equally across exposure buckets in contrast to its next largest peer, the ProShares Online Retail ETF (ONLN), which uses a market-cap-weighted index methodology. Both ETFs hold e-commerce companies like Amazon (AMZN), eBay Inc (EBAY), Chewy (CHWY), Wayfair (W), and Etsy (ETSY).
• Airline hop: Another area in which consumers continue to spend is travel and entertainment. Several factors – including increased goods purchased during 2020 and higher housing prices – have left consumers with less space to enjoy physical objects. This has caused them to move toward experiences like travel, entertainment, and restaurants. Social media in the younger generation has also played a role in increasing preference for experiences over goods. Data from the Transportation Security Administration shows that airline passenger volumes have actually exceeded prepandemic levels in 2024. But the travel industry has still suffered from cost and operational issues. The U.S. Global Jets ETF (JETS) is the largest travel ETF that specifically focuses on passenger airlines, aircraft manufacturers, and airports. But there are plenty of other options in the travel sector. These include broader travel ETFs like the Defiance Hotel, Airline, and Cruise Line ETF (CRUZ), which also includes hotels, cruise lines, and other travel beneficiaries.

This or That: The Trending New Economy or Mending the Old Economy?

Mega-cap growth, Magnificent Seven, Nvidia (NVDA) – all of these have been attractive over the past year. And while we’ve seen pullback in certain growth areas, it’s hard to jump off the train early when there’s still some potential growth. There have been some signs, however, that investors are starting to rotate away from riskier areas and take interest in “tamer” growth options like the Industrial Renaissance and reshoring as seen in net flows from both ARKK and PAVE.

• The trending new economy: Some of the original, high-profile thematic ETFs were the ARK suite of products, including the ARK Innovation ETF (ARKK). Launched in 2014, ARKK is a catch-all for the “new economy,” including everything related to technological innovation and digital disruption. It focuses on areas like intelligent devices, autonomous mobility, and digital assets. Top holdings include innnovative stocks (yet household names) like Tesla (TSLA), Roku (ROKU), Roblox (RBLX), Coinbase Global (COIN), and Palantir Technologies (PLTR). Many of these names, which previously offered growth, are now more associated with risk than return. That’s because the market is beginning to shift away from growth and technology.
• The mending of the old economy: On the flip side, old economy sectors like industrials can be less exciting than robots and AI. But they offer modest growth potential in a more tangible way through themes like infrastructure development and reshoring. One of the original infrastructure ETFs, the Global X U.S. Infrastructure Development ETF (PAVE), has around $7.6 billion in assets (currently beating ARKK by over $2 billion in assets). This ETF holds companies that have significant exposure to infrastructure development through construction and engineering, raw materials, products, and industrial transportation. Recently, several similar ETFs have launched. These include the Tema American Reshoring ETF (RSHO) in May 2023, and the iShares U.S. Manufacturing ETF (MADE) and the Global X U.S. Infrastructure Development ex-U.S. ETF (IPAV) in July 2024 and August 2024, respectively.

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