Webinar Replay: Thematic Investing and the Stay-at-Home Economy

Jun 10, 2020

With widespread office, school, and business closures, and global shelter-in-place orders, COVID-19 has upended many aspects of our everyday lives. In this webinar, Global X’s thematic research team looks at how long-standing habits and traditions have quickly changed amid this disruptive environment and what it may mean for certain industries and themes going forward, including Cloud Computing, E-commerce, Video Games & Esports, and Robotics & AI.

Please scroll to the end of this page to see relevant ETF holdings.

This information is not intended to be individual or personalized investment or tax advice and should not be used for trading purposes. Please consult a financial advisor or tax professional for more information regarding your investment and/or tax situation.


Jay Jacobs:

Thanks, everyone, for joining the webinar today. Hope everyone is staying safe and at home. We really appreciate your time joining us. We’re going to talk about thematic investing in the stay at home economy, which of course is not just on people’s minds, but has been a very real part of everyone’s daily life for the past few months or so and potentially will be for many more months.

I want to quickly introduce the team with me on the call. Joining me is Pedro Palandrani, one of our research analysts, as well as Andrew Little, another of our research analysts. Both of them cover our Thematic Growth suite ETFs. They’re regularly putting out fantastic content on Twitter or online on our website

We are Global X. We are an ETF issuer based out of Manhattan, although right now, based out of all over the country I would say. We have more than 70 ETFs with about $10 billion in assets under management. What we’re going to be of course focusing on today is our Thematic Growth Suite of ETFs, which represents about

18 ETFs out of our product suite and just shy of about $4 billion in assets under management. We’ve been doing thematic investing for about ten years going back to the launch of our lithium and battery tech ETF in 2010. It’s a very core part of who we are and what we spend a lot of time thinking about as a research team. So we are excited to share our latest research with you today.

Our plan today, we’re going to talk about thematic investing. We’ll give a little bit of an overview. Then we’ll talk about what is Covid-19’s impact on thematic investing. Then we’ll dive into the actual themes. As I mentioned, we have 18 thematic ETFs. Which of them are really the best suited to be coping with the COVID-19 pandemic? Then we’ll wrap it up with the Q&A after that.

What is thematic investing? Really, what we’re talking about here is the process of identifying powerful macro-level trends that are disrupting huge parts of the global economy. From the bottom up, we’re trying to understand what are the companies that really stand to benefit from the materialization of those trends. As an ETF provider, we’re really doing both parts of that process.

For what themes we decide to launch in an ETF, we go through a rigorous research process for what we believe will disrupt the global economy. Then we work very closely with our index providers to develop custom indexes for each of these themes They’re designed to be long-term growth-oriented strategies. They’re unconstrained by geographic and sector definitions. We don’t care if the company is in the US, if it’s in Europe, if it’s in Asia; we just want the companies that are the best positioned for each theme.

Because of the unconstrained nature of some of the strategies, they tend to have low correlations with other growth strategies in one’s portfolio, but they’re also related concepts as we’re going to talk about today with the stay at home economy. We are living these themes in real life right now. We think that draws a very nice parallel between investors and their investments when they can understand what is happening in their daily lives.

We have a lot of different themes. How do we get to most of our 18 different Thematic ETFs? We follow a three-step process, which first looks at conviction, that believe that the change that’s happening in your demographics, or politics, or the physical environment is going to have an observable and measurable impact on the global economy. Next we look at investability. ETFs need to have at least 20 investments, but we really prefer more like 25 to 30 as a minimum so that we’re not getting a diluted exposure or exposure that’s already going to have a huge portion of the exposure in your portfolio.

Lastly, we’re looking timeframe. We want these to be long-term themes. They’re going to take many decades to play out. What’s interesting about COVID-19, and we’ll get into this in more detail later, the timeframe is still very much long-term for these themes, but those events like COVID-19 can actually warp some of the adoption. We’re going to show that in a couple of slides. Timeframe is actually a big component of what we’re going to be talking about today. Briefly, here’s the list of our 17 individual themes and last the 18th which is the Global X Thematic Growth ETF at the bottom right there.

In accordance with our research around thematic investing, we’ve spent a lot of time developing a thematic classification system where we’ve looked across the thematic ETFs in the US. We’ve identified those ETFs and we’ve put them into these different categories, which is a four-tier structure where an ETF will be placed in one of these various boxes here. It’s a FinTech ETF, or an electric vehicle ETF, etc.

The reason why we’ve done this is thematic investing is very new. We’re seeing a huge proliferation of ETFs on the market, a huge rise in assets tracking those ETFs, but it’s still very much in the early days of thematic investing. We felt that there just wasn’t really a classification system out there that was doing a great job capturing the trends that are happening within the thematic investing space.

As you can see, over the last five years or so, we’ve gone from about 40 thematic ETFs to over 125 across the US. Total assets have gone from about $5 billion to over $25 billion. There’s been a real surge in thematic investing, particularly in the disruptive technology space, which we’ll be talking about a good amount today as well.

When you look at it within the individual themes, an interesting observation, AI and Automation used to be the largest theme by AUM for years. That actually just changed in the last quarter and Cloud Computing became the largest theme by AUM. That is one of the themes we’ll be talking about today that plays a very critical role in the COVID-19 crisis. I think that could be one of the reasons why we’re seeing that theme increase in AUM.

What is COVID-19’s impact on thematic investing? I don’t know if many asset managers do this, but I think this is fun. I’m going to go back to our 2020 outlook from December of 2019 with full disclosure that we know that everything we thought of in December of 2019 is of course very different today. The way we thought about the thematic outlook for 2020 was looking at what are the primary drivers for each of these themes?

Some of this comes from business spending like Robotics and AI where the real driver of that theme is going to be how many companies are investing in Automation. Is it going to be consumer spending and habits where most of the money going into that theme is going to be coming from consumer’s pockets, or is it going to come from more of a policy or regulatory environment where meaningful changes at the government level are going to be what’s driving those themes going forward? None of that at a fundamental level has changed. I wouldn’t move any of these inside to a different part of this Venn Diagram based off of COVID-19; of course, I think the outlook has changed a little bit and what are some of the drivers here are changing a little bit.

I want to keep this in the back of our minds because at the end of the day when we think about what’s driving these themes forward, it’s going to come down to ultimately is a company or consumer spending and how are they prioritizing that spending amongst all the different ways that they could spend that money. We’re going to talk about cloud computing later today, what do you think about the work from home environment. When you think about the work from home environment, suddenly, companies have really had to prioritize putting in place cloud computing so that they’re able to keep their work from home setups working effectively.

When you think about consumers, they’re thinking about how do you spend your money when you have maybe some more risk. You’re concerned about your job; maybe you’re taking care of a loved one. How do you prioritize your spending as a consumer?

Is it going to be spent on travel? Probably not. Is it going to be spent on something in your house? That’s probably much more likely. In the current policy and regulatory environment, we’re going to be looking at how does the government potentially change its priorities in line with COVID-19?

All of these topics on the right-hand side, people see every day if they go onto their favorite news source: the impacts of monetary and fiscal policy, rising Unemployment, plummeting GDP growth expectations, the impact on crude oil prices, etc. All of that is very relevant. It’s impactful across the markets, but today we’re going to focus on the bottom that isolation is increasing the adoption of certain technologies as consumers form new habits. This is a direct outcome of COVID-19 as people are stuck at home, staying at home trying to reduce the spread of the virus, and presenting a truly once in a generation opportunity to change very strongly ingrained habits.

What are some of those habits that have changed? This is just a personal anecdote. I’m sure someone else is – I’m sure everyone has their own habits that have changed, but in my prior pre-COVID-19 life, living in New York City, ordering in food, dressing business casual for work, going out to bars and restaurants, meetings with clients over around the world. All of that has changed in the last couple of months, every aspect of it: moving out to the suburbs with family, cooking from home, dressing like you’re at home, entertaining yourself with a TV screen, connecting with friends via social media.

Every aspect of our lives has changed. I’m sure many of you have felt that as well.

One thing we like to talk about a lot when we think about thematic investing is what we call the adoption curve. Really, it’s looking at the speed of which a new technology is adopted or a new theme comes into play, but it’s also showing the total market size of a theme. The idea here is that very early on, there’s a few people that start adopting a theme.

Think about the people that bought those really ugly electric vehicles in the 1990s. They had like a 30-mile per – a 30-mile range. They looked terrible; they were expensive. That’s the innovators.

If you start to extrapolate that towards the introduction of Tesla and you’re starting to see a broader audience buying electric vehicles, and they’re changing their homes to have specialized charging ports, that’s when you start to get into the earlier adopters phase. There’s more people; sales growth is accelerating until maybe we get into a future where everyone’s driving an electric car. It’s a fully penetrated market. Growth is slowing down because it’s fully penetrated that market. There’s no more market share to take from another old technology. That’s what we’re looking at with the adoption curve here.

If you look at it over history, you see that adoption curve is actually a pretty consistent S-shaped curve. All the way back to the telephone, to electricity, to the refrigerator, it follows a very general S-shape with slow initial adoption until it shoots through the vast majority of the population, and then ultimately peaks at the top of its market. The only difference I would say really over the course of those 100 years or so is that S-shaped curve has gotten steeper, that adoption is happening faster than ever before; whereas in the beginning of the century, it was much slower.

What I would also highlight on this chart is that disruptive events have an impact on adoption. Here I’ve marked out the Great Depression and World War II roughly on the chart. You can see that there’s a break in that S-shape. It doesn’t have the same clean line that air conditioning does and the cellphone does. Things start to dip down.

There’s a lot of reasons for that. If you look at the Great Depression, I think just disposable income is probably the biggest reason why things started to go down. If you look at clothes washer, or if you look autos, autos took a dive during the Great Depression that actually continued through World War II. That could be disposable income challenges, that could be that a lot of automobile manufacturers were making military equipment instead of trucks. What you can see is that these events do have an impact on the speed that things get adopted just like COVID-19 will have an impact on the speed of certain technologies being adopted.

It doesn’t always mean that things slow down. Yes, autos slowed down during the Great Depression and during World War II, but what you actually see is the refrigerator accelerated during the Great Depression. Why is that?

One theory that comes to mind is perhaps people were looking for ways to save food longer because there was much more concerns about where they’d get their food from. Trying to keep their food was a way of savings. Maybe it was an outlay that cost a lot of money, but being able to store food for a week instead of a couple of days is actually very meaningful to a lot of families. The refrigerator I think is a very interesting example of something that really thrived during a very unusual time for the world.

What does COVID-19 mean for adoption curves? We believe it means two things. The first is that certain technologies are going to be adopted faster than ever before because, suddenly, the adoption curve has to happen at an accelerated pace. I’ll give an example of this.

At Global X, we recently adopted an internal messaging system. Think about it as Email 2.0. Would we have adopted that in the future? Probably over the next few years or so. That’s the kind of thing that most companies are finding ways to adopt into their daily workflows, but we got it a day after work from home orders came in. Suddenly, something that may have taken two or three years to get implemented happens overnight. That’s the steepening of an adoption curve is that acceleration really pulls forward and many people start adopting things faster than they otherwise would have in a more organic environment.

The other aspect is the curve shifting upwards, bringing the market to be bigger than anyone ever expected. An example of this is if you think of an E-commerce company. Most E-commerce companies do not think of the Silent Generation, people born between 1928 and 1945, as part of their addressable market. They just don’t expect people in their 80s to be logging into Amazon and buying things for themselves, but that is one of the most vulnerable – that is probably the most vulnerable cohort during the COVID-19 crisis, a cohort that has been very diligently staying at home, and still needs basic goods whether it’s food, whether it’s home goods, whether it’s medicine. You actually have a lot of those people from the Silent Generation learning how to use Amazon for the first time and ordering from those sites.

What this is doing is it’s shifting the curve upwards. There’s an addressable market now that is bigger than anyone ever expected before. You combine that with the curve steepening from people adopting those technologies faster than expected and it creates a very disruptive moment for many of these themes as it’s happening faster and in a bigger way than anyone ever expected. That follows up our intro. I’ll pass it over to our Research Analyst, Pedro Palandrani, to start talking about one of the most critical themes to the COVID-19 pandemic, Pedro.

Pedro Palandrani:

Okay, thanks, Jay. Good afternoon, everyone. Let’s talk about Video Games and Esports theme here.

Before that, it has been said that there are decades where nothing happens and there are weeks or months where decades actually happen. I would say that there’s no better way to describe the level of transformation and disruption occurring in many themes in our economy right now. The Video Games and Esports is really one of those that is seeing tremendous transformation.

What’s important to recognize is that the Video Games and Esports market is a very large one. We’re talking about a $150 billion market. Just for context, it’s larger than the movies and the film industry and professional sports revenue combined. It’s not a niche market at all. If you look at the bestselling games historically, we can see that GTA 5 launched back in 2013 netted about $6 billion while the bestselling movie ever, Avengers: Endgame, last year generated approximately $3 billion dollars, so only half the size of the best video game. That talks about the large opportunities in the industry, but also about how video games have become a champion within the entertainment industry.

If we look by geography, we can see that the US is actually the largest gaming market by revenue followed quite closely by China. Asia in general is playing a very important role in the development and growth of the industry. I think that for investors, this is important because it shows how relevant it is to have a diversified global exposure to the theme with leading companies from all over the world. Ultimately, this is an industry that is expected to reach close to $200 billion in the next couple of years, but as Jay was explaining before, we could expect that level of adoption to actually accelerate as a result of COVID-19. These estimates may actually be exceeded by newer estimates post-COVID-19.

Now, if we look beyond COVID-19 for the industry, the reality is that there are many drivers post the crisis that are likely to keep pushing the industry to greater adoption and greater penetration levels. One of those drivers is the launch of new video game consoles. Actually, by the end of the year, both Microsoft and Sony are expected to release the new Xbox Series X and PlayStation 5 consoles.

It is going to represent the first major hardware improvement or hardware upgrade since 2013, so seven years ago. This is important because every five to seven years, these new console manufacturers bring this new generation of consoles to market. This year, for example, the new consoles are expected to feature 8K TV support, and ray tracing technology, solid-state drive storage, basically new enhancements that will bring unprecedented realism to games and faster load times. It’s quite amazing what’s happening with that new technology.

The question really is what does it mean for the video games industry? Historically, the release of a new console actually generates positive spillover effects for game developers and game publishers. After all, if you think about it, the first thing we all do after buying a new console is to buy a new game to try out that new console. If you look at the last console upgrade cycle, it really translated to strong stock returns for game developers.

What you’re seeing in the right-hand side chart is that during the 2013 console upgrade cycle, which included the Xbox 1 and PS4 rollouts, on average, leading game publishers like Activision Blizzard, Take-Two Interactive, Ubisoft, and Electronic Arts outperformed the broad market in the tech sector. This time around a big difference is that the hardware manufactures are not only locked in on the new console, on the hardware, they’re also thinking about the launches of their cloud gaming platforms. PlayStation Now, Microsoft xCloud are two of these platforms. Also, tech giants like Google that launched last year are looking at cloud gaming; Facebook is doing something similar. We believe that just as Netflix disrupted the distribution model for movies and TV shows, cloud gaming could have a similar impact on the video game industry. That’s certainly another tell waiting for the theme that is expected to continue over the next years.

Beyond the new console cycle and cloud gaming, those are only tailwinds to the many others that are taking place in the industry today. Esports and streaming have been a big growth driver for the industry very recently. Esports has basically professionalized the industry with teams participating for dollar awards in tournaments and getting sponsorships.

While streaming, it really has been a huge new avenue to monetize gaming. You can think about a Ninja which is probably the best example when it comes to screening. He may not be the best player of Fortnite, but he’s a great content creator. Gamers like Ninja usually get a cut from their subscription paid by the viewers on platforms like Twitch and Mixer if you’re in the United States, but also Huya and Douyu in China.

The audience is very large. Last year, there were about 440 million total viewers around the world; in many cases, a much larger number than the people watching traditional sports. That’s a trend that is likely to continue in not only newer generations, Millennials, Gen-Zers, but also with older generations. That talks about the fact that the total addressable market for many of these themes is actually expanding as data was showing before.

As you may be aware, the recent COVID-19 crisis has expanded the number of gamers around the world, but again, also expanded the number of people turning to video games, streaming for entertainment. Last week, Fortnite, for example, just announced that they reached 350 million players. Call of Duty: Warzone also reached 60 million players in a record period of time. The popularity of gaming continues to increase as a result of shelter in place orders which are generating greater monetization opportunities for many companies in the video game industry.

In addition, there’s an important fact to highlight here is that not only Millennials and Gen-Zers are playing video games or watching others playing video games; other generations are also doing that, having this type of behavior. The stigma of playing video games is almost dead because a lot of generations have already grown up around video games. Yeah, like I said before, many of these trends are certainly likely to stick post-COVID-19.

Within those two segments, we like to think of four different sub-segments that it capture the universe of companies in the theme. We can see here industrial robots. These are robotic and automation solutions in the manufacturing sector like the auto industry and consumer electronics. Actually, the two largest markets for industrial robots. The other three segments are unmanned vehicles and drones. That’s pretty straightforward. There are a lot of companies commercializing drones for consumer usage like videos and racing, but also drones are taking an important role within the defense industry.

The third segment is the non-industrial robots and these are robots outside the industrial sector such as – you can think of healthcare with robotic surgery or agriculture where we’re seeing a huge proliferation of robots picking and harvesting crops with vision technology. Huge growth within that individual segment. The last one is artificial intelligence. I’m sure you can think of companies like Nvidia for example. I’ll make an important note here that there’s a misconception that robotics are completely separated to artificial intelligence. What we’re seeing is that, the largest manufacturers of robotics are actually incorporating machine learning algorithms and AI systems within these robots.

I’ll give you a quick example. One of the most interesting trends that we’re seeing today is the introduction of a digital AI simulator or digital twins for robotic training and improvement. In the past, if you look at previous robots, when you were training, those robots required a lot of time, required a lot of capital, engineering expertise, but currently, AI simulators are becoming increasingly accurate at transferring learning to the real-world application. These simulators can run thousands if not millions of iterative processes just in seconds basically creating a lot of data, a lot of training data that only until now can actually be transferred to real-world applications to the real-world robots, the physical assets. That’s quite transformational for the industry as a whole.

For investors, it’s also very important to understand that industrial robotics or the penetration of industrial robotics remains very low. In average, there are only about 99 industrial robots per each 10,000 manufacturing workers. In other words, that’s 1% robotic density when compared to the number of manufacturing employees around the world. Yet you can see here that countries like Singapore and South Korea have about 8% robotic density and we expect many countries to actually move in that direction. We recently met with FANUC which is one of the largest robotic manufacturers in the world. That Japanese company and they’re expecting to sell many robots in the next five years as they sold over the last 30 years. Talks about the breadth and adoption of robotics across sectors, across the industrial segment.

A lot of this growth is driven by significant improvement in technology, but also by declining costs of robotic solutions.

As we look at recent events and exogenous risks such as trade conflicts like last year, geopolitical tensions in some places like Europe and in UK, and of course, now, the global crisis around COVID-19. All these events have companies rethinking their supply chain strategy. We believe that companies are looking to re-shore their manufacturing capacity to their home countries and basically trying to maintain greater control and avoid all the interruptions that we have seen recently in supply chain. We have seen that in the pharma industry, in the auto industry, in consumer electronics as well.

This is the last slide for the robotics and artificial intelligence before we jump into cloud computing. Here you can see how – that’s a view to one of the Amazon Fulfilment Centers. Our research team recently visited one of their centers in New Jersey before the COVID-19 crisis of course. We really experienced first hand how much automation is used by a company like Amazon here. We saw their Kiva robots which are like bots equipped with storage towers moving all over the place in a very orchestrated way in the stowing and picking phase. Also, automated labeling machines in the packing and shipping phase.

One important key takeaway of our visit was that, robots are working alongside humans, so it’s not like robots versus humans or the theory that robots will take over all the jobs. Humans are very important for some functions where technology hasn’t been able to reach. Equally important is the fact that companies that implement robotic solutions continue to hire a lot of people. Robotics and automation are basically increasing productivity and then, companies can actually reinvest in people, train more people, hire more people. We think that Amazon is a good example because we have seen recently the thousands of new hires that they have had over the last few months and they’re one of the leading companies in implementing robotic solutions. With that, I’ll pass it over to my colleague, Andrew to go over our cloud computing and e-commerce themes. Andrew?

Andrew Little:

Appreciate it, Pedro. Moving on to cloud computing. Cloud computing describes the availability of IT services, so from your basic infrastructure like computing storage to application development platforms and specific software applications that you might use in your day-to-day activities. All these things leverage pooled resources and economy to scale which make them very appealing both for companies, investors, and consumers. We segment them into the following buckets. Software as a service, also called SaaS. You can think about this like your online software that you would use maybe at home to file your taxes. There are a bunch of different use cases here.

Platform as a service going back to what I was saying about creating software applications. These are platforms where you can code on the internet on a variety of different platforms. A good example, Salesforce. Their massive platform offers through Salesforce Lightning the ability for coders to go in and code particular applications just based off what they’re trying to provide for clients or just trying to advertise an application to begin with. Then you have infrastructure as a service. Here you can think about your classic IT room with servers, wires everywhere except there are no servers or wires anymore.

Now all of those are held in a different location either owned by a public cloud provider. You can think about Amazon, Google, a bunch of different public cloud providers there, but they’re main players. In this case, everything is stored up in the cloud. You can purchase storage and compute as you go. It’s really scalable. Then you have data center REITs. The storage needs to be physical somewhere and here is where the data actually exists. The public cloud companies rely on the data centers that the REITs invest in to store and compute.

All that together and then, also thinking about the components here that make all of this possible. Some of these are specialized. Others are just general components that are not sophisticated enough for this type of tech. Example here being chips that are built into servers, specialized networks, switches and routers, those types of components. We see immense growth in the theme in recent years and expect this to continue for quite a long time. Without taking it too deeply, it’s clear that businesses and individuals rely on cloud infrastructure and software. You can see that on the right there by some of those survey results. 86% of those surveyed in this particular survey expected to see an increase in infrastructure as a service and platform as a service spending.

It’s very pervasive, but this doesn’t mean we’ve reached peak adoption. A lot of different surveys show that companies plan on increasing their cloud spend and overall adoption now and also in the years to come. Cloud computing. We think it presents a very attractive business model both for the companies, investors, and again, the consumers. Cloud computing business models, you think about it as this revenue stream that’s recurring and it’s very sticky. For cloud computing companies, they generate these recurring revenues through subscription-based services. They’re able to get steady cash flows.

For most of these companies, costs are minimally variable. Additionally, the services these cloud companies provide to their customers become so valuable, so integral to the operations of the businesses they serve, you don’t end up seeing very much churn or in other words, lost customers. These are very sticky relationships. For consumers, cloud infrastructure and software means scalable on-demand resources that are customized just for their individual needs. The subscription-based aspect of the cloud service for the customer is also beneficial because they can predict their IT spend a lot better than before where maybe with a legacy server you have to think about maintenance. You have to think about maybe buying a whole new server and where would you put that server. Here for a consumer, there are definitely benefits.

For investors, this means potential access to an investment area that may not stop growing in the near future. It also means possible cross-industry exposure while still benefitting from cloud computing business models as many cloud services serve companies across industries or depending on the product, particular industries, healthcare for instance. To get an understanding of these dynamics, I think we should look at the software as a service segment. It generates more revenue than any other cloud segment.

In 2019, those revenues totaled $94.8 billion. Ahead of platform as a service, infrastructure as a service, and all other cloud segments. Even though we still see growth in all of those segments. Software as a service revenue should continue to eclipse those other cloud segments in the near long-term. By 2022, they’re expected to reach $144 billion. Adding credence to this, software as a service is maintaining significant revenue share. Cisco expects that by 2021 75% of all cloud workloads and computing instances will come from SaaS applications and the SaaS business model is geared for potential long-term growth. Again, capturing recurring, sticky cash flows with predictable, mostly fixed costs.

The chart on the left here we can see that these characteristics lend themselves well to long-term revenue growth and healthy margins. In 2013 to 2016, quarterly software as a service revenues grew by an average of 14% year over year and in the three years since then, this average reached around 17%, so pretty consistent growth there in the mid to high team double digits. Looking at margins, the median gross margin for public software as a services companies was 72% in 2019. This is up from an already healthy 68% in 2014. Clearly, we see strong revenue growth and expanding margins.

Even though customer acquisition cost are ticking upwards, $1 of recurring revenue cost, $1.14 in 2018 versus $1.11 in 2017, revenue growth is far outpacing this and the customer acquisition cost payback period continues to shorten. That means over a fewer number of months, you end up getting back the spend you put out there to get that customer. Simply put, software as a service companies are attracting new customers, retaining existing customers, and upselling expanded services with all of these things supporting higher profit margins.

As we touched on COVID-19 induced stay-at-home measures, it means people are stuck at home. Some businesses especially those in the service industry are truly affected and can’t really operate virtually, cloud infrastructure and software means that others can operate through digital mediums. You only need a computer and internet connection to access cloud software and infrastructure. They can access the same applications they would at work, access files stored on their company’s private cloud, and collaborate with colleagues through virtual work environments like the collaborative work environment that we adopted at Global X early on in this pandemic.

At the onset of the pandemic, we saw a drastic uptake in interest around remote working jobs and really services as evidenced by the chart on the left here looking at the Google Trends. We’re actually ranking these keywords versus all searched terms in that time period. Definitely a massive increase there. As that interest turned into implementation, at home broadband data volumes also increased as we can see on the chart on the right. The uptake in average working hour data volumes here, that’s those left two bars is directly related to the overall increase in data usage by the right two bars. Using myself as an example, every day I log on to my computer in the morning using a cloud-based VPN to access shared files which is stored in our company’s infrastructure as a service cloud.

I used cloud-based software like Microsoft’s Office suite, put slides like this together. Many of our meetings are done over cloud video conferencing software which I’m sure many of you are well accustomed to at this point. I know that a common term now is Zoom fatigue. Hopefully, people aren’t too Zoom fatigued yet. Even now, we’re conducting this webinar over a cloud-based server. The cloud is everywhere and the more virtual we get, the more all-encompassing it is.

Moving on to the next theme, we’re going to explore e-commerce. We think e-commerce is introducing a new age of retail particularly right now. Over the past decade, e-commerce has rapidly become the main medium for consumption when you really think about, what do you want to buy? You go on Amazon and you purchase it. It shows up at your door the next day.

We look at this theme through four primary segments. Online marketplace operators. Here you can think about Etsy or eBay where sellers can list their goods online. E-commerce software, examples here being Shopify. There are a couple other players in the space but this is where individual retailers can open their own e-commerce store fronts. Also, online retailers. These are most people’s go-tos. Like I was saying before, these are your Amazons or in China your Alibabas. Maybe a little bit different in terms of their layout there, but both of these companies or all of these types of companies would sell their own goods as well as helping third party retailers sell their goods by warehousing, inventorying and offering those products on their platforms.

Then also we have omnichannel retailers. These are the companies that have multiple places where you can buy goods, but they also have a significant online presence that drives their overall sales. A lot of the major names that you think about that have big storefronts and also, you can buy online, that’s your example of an omnichannel retailer. People really love shopping from the comfort of their own homes. It’s seamless and especially with fintech, you can get just about everything with a push of one button. You think about having – when you log on to your Amazon account or whatever you use to shop online, just being able to hit buy now and really not do anything more than that. That really shows interconnectedness of fintech and also, e-commerce and just how we’re definitely at this inflection point and all these different themes are converging, both driving and benefiting from each other.

In a lot of areas, we’re seeing that the e-commerce sales make up a significant portion of overall sales and while these areas have a ways to go before we can start to think about full penetration, there are definitely some areas that are still just starting to see online orders as a viable option. In particular, looking at the chart on the right, these areas include health, auto, and also food and beverage, but with companies like Tesla, selling cars online, alcohol and grocery delivery services especially now when it’s a little more difficult to go to a grocery store, and then, also prescription deliveries catching on. We see advertisements on TV about that all the time. We really think that this penetration is going to happen in the years to come.

Let’s take what’s happening right now as I was saying with the online grocery deliveries. Before the pandemic, only about 3% of US grocery purchases were made through the internet. As people stayed home to avoid the spread of the coronavirus, online orders surged and by March 15th, around 30% of grocery deliveries were made online and then, about a week later, this number was 37%. This is a couple of months ago. Really thinking about how compelling it is being able to go on to your phone and just hit what groceries you want and then, it shows up without having to put your health at risk. It really makes sense and when things makes sense, new habits form fast.

We think this is a really sticky trend that will continue. More recently, going back to the auto example, Tesla noted in their most recent quarterly earnings report, they were actually able to make a little bit of a sales push towards the end of the quarter due to their online store and how it enabled contactless purchases and deliveries. Prior to the pandemic, a lot of e-commerce retailers expected a positive to neutral impact on their business. Of course, it really depends on what their business is. What they’re selling. Economic uncertainties may have impacted all sales, online or not. Online retail gives customers this access to essential goods without going to their local pharmacy or supermarket.

This survey was pre-COVID as we were starting to realize what the implications were and then, the chart on the right is looking afterwards. We definitely saw a change in how goods were being sold. We think about omnichannel retailers. Again, it’s those companies that have exposure to multiple different selling mediums, online and physical. A lot of these physical storefronts are closed, so we look at omnichannel and we’re interpreting that as okay, these are their online sales. They sell diverse goods. They sell essential goods. Looking at the steep gray line, that’s the trend line for essential goods just pre-COVID benchmark comparison.

Obviously, very up there. We see omnichannel which is the blue line ticking upwards towards the end of March. Of course, there’s that little bit of market shock in the middle there. Again, these are sales, so when I say market shock, that’s just consumer patterns. Then e-commerce, pure e-commerce, it shows that it’s going down here but again, omnichannel retailers here are selling online because all their physical storefronts are open. Here when we think about these e-commerce-only companies, they’re more your niche luxury brands, your street wear. Things that people, when the going is good, are more likely to buy. This in online, this chart shows a lot of positive sentiment toward e-commerce.

What does the future hold? Outside of the tailwinds that we were talking about from the stay-at-home economy, there are a number of drivers we expect to really push e-commerce moving forward. Social commerce represents the intersection between social media and e-commerce and you’ve probably seen it in action. A store built into Instagram or Facebook, selling items that are catered to your tastes. I know that I definitely have a few pairs of shorts, sweatshirts, random technology that I definitely bought after seeing it. On any number of social media platforms, but over and over again and then, eventually, you forget where you saw it and you think it’s a great idea and you end up buying it.

Over the next five years, I think that we’re really going to see an increase in these types of sales. It’s really playing on the idea that social media companies have all of this data and that you’re able to optimize sales using that data. Then e-commerce is also benefitting from convergence of multiple disruptive technologies. I already touched on fintech. I think that’s a really good one, but also, one that made me think a little bit more outside of the box. Augmented reality and virtual reality give customers the ability to see what furniture would look like in their house.

The other day, I logged on to a – I have furniture. I don’t know why I do this, but I downloaded the IKEA app and just put tables in random places to see what it would look like. Yeah, this is totally something that companies are doing now. It’s really interesting to be able to see. That you don’t have to go in the stores to know what furniture is going to look or what shoes would look like on your feet.

Jay Jacobs:

We want to take you to the key takeaways here before Q&A. We’ve seen a lot of good questions come in there. We’re going to hope to address a few of those. The key takeaway is, thematic investing is long-term oriented. We’re trying to identify those categories that are going to benefit from long-term structural changes across the global economy. These are really new paradigms. There are changes in technology. There are changes in consumer habits and demographics, changing physical environments.

COVID-19 is an accelerant and a market expander for a lot of these things. There are just many more people that are looking at these technologies now. That are looking at these services like e-commerce or cloud and they’re adopting it at a faster pace than ever before. We think those are going to have a huge impact across a variety of different themes, but most importantly, before we talked about today, robotics and AI, video games and e-sports, cloud computing and e-commerce. With that, we’ll take a few questions from the audience. I’ll just remind everyone that we have a lot of research we’re putting out on a regular basis on our website,

The first question, I like this question a lot. Do you think that the five hours extra and the number of players for popular games, sports, substitute, et cetera will be sticky when the new normal environment arrives? Are these just blip things that are happening or are these real structural changes that are going to change consumer habits over the long run? I want to go back a few slides here to go back to the adoption curve. Actually, it will go back to our adjusted adoption curve for COVID-19. First initial response, obviously, there are people who are stuck at home that are not going to be stuck at home going forward. Maybe if they’re spending five hours playing video games today, that normalizes somewhat in the long run once they can leave their houses again.

We’re not trying to say that the five hours is a sustainable additional benchmark here. The questions is, how much has that consumer habit really changed for the long run? How many new people are entering the gaming market that haven’t been gaming before? How many people are looking at e-sports who had never wanted to watch e -sports before because it’s very hard to get new people to change their habit. Once you’ve brought someone on to a gaming platform or brought someone to an e-sports platform, you have an opportunity to win over that consumer for a very long time. We can see in this slide that four and a half million people watch the Formula 1 Virtual Grand Prix or almost 400,000 people watch an NBA game between two players.

I’m sure many of those people came from a background where they were watching these sports on a regular basis, but a lot of those people probably weren’t. They are probably people that were interested in Formula 1 or were interested in the NBA and wanted to see two players compete against each other in a way they never had before. Now there’s an opportunity for those people to continue to be watching e-sports going forward or continue to be on those gaming platforms going forward. That is a huge structural change. A little anecdote here, but it’s very hard to generate adoption past early adoption phase. They call it the chasm and there’s been a lot of work done about how do you get from early adopters to early majority. That’s where a lot of themes can die.

If you look at Netflix, when they started a few years ago, when they were really building out their digital platform for streaming, they used to have to pay $200 dollars per user to acquire a new customer. Think about three free months. Think about all the advertising they’re sending people or think about banks that send around, open an account with us and get $500 or sign up with Blue Apron and get your first three meals free. All of that is just showing how expensive it is to get a new customer to do something different. To drive adoption further so that there’s a new momentum behind that adoption.

COVID-19 is a gift to a lot of these new themes such as e-sports where they’re really trying to create a critical mass that starts pulling in more and more people every single time there’s an event. I think that’s happening and I think that’s going to be very sticky because you just don’t get an opportunity like this to bring in so many new potential customers in a very quick timeframe. The second question is, are valuations already stretched in this asset class? That’s a question we get a lot with thematic investing. I’ll answer it a couple of ways. First of all, valuations on the high growth tech themes are probably going to be more expensive than value stocks. It’s not going to look like energy. It’s not going to look like cheaper consumer staples companies or materials companies or anything like that.

They are going to be more expensive, but we have to look at it in a different way. A lot of these companies are not trying to be profitable right now. A lot of the e-commerce companies, a lot of video game companies are not in the business of paying out dividends or doing buy backs for their investors. Their investors don’t even want that. The investors want them to take every incremental dollar they have and pour it back into their business to drive additional growth. Make us another game, advertise to more customers to get more people on your platform. Build out a bigger sales function. A lot of these companies are very intentionally not trying to generate a new sort of earnings or return capital of the shareholders.

We don’t look at them on a price to earnings basis. They’re trying to get that basically to zero which would make price earnings very, very hot. We look at it more often on price to sales because sales is something that they are trying to maximize. How quickly can they grow through that adoption curve to maximize sales? When you look at it on a price to sales basis, that gives a more useful metric when you’re comparing the high growth team to something more generic like the S&P 500 or the MSCI ACWI. As I mentioned before, high growth themes tend to be more expensive gross aspect.

One more thing we do when we’re looking at valuations of these high growth themes, because we look at price to sales, but then we divide it by the forward expected growth. This is actually very similar to what people do with a peg ratio of price to earnings divided by growth. This is just price to sales divided by growth because all else equal, a faster growing company should be more expensive because you’re really paying for future expected cash flow. When you start looking at it in more specific ways where you look at price to sales over price to earnings, you divide it by growth to try to normalize and compare apples to apples between different areas.

You see that a lot of these themes actually are not that expensive for the growth that they’re generating. We’ve obviously seen a little bit of a recovery over the last few weeks here. In many of these themes, trading 15%, 20%, 25% below where they had started this year because long-term themes in general, I would say that any pullbacks that happen in the future, I would definitely see those as potential buying opportunities because I make sure we are looking 5, 10 years out and those tactical entry point can certainly be very attractive.

The next question, with expected consolidation across many industries, do you see issues with companies being able to extend pricing power from that consolidation due to the possibly prolonged depressed – I can see more sentiment. Andrew, I’ll pass that one over to you today.

Andrew Little:

Thanks, Jay. I think at more regular times, companies with pricing power definitely benefit from some degree of elasticity. They can increase prices within reason and not expect a huge change in how much they’re able to sell. In a downturn, these companies with pricing powers in their respective segments tend to be more protected than those other players that maybe don’t have as much pricing powers. These companies have market share. Their customers are loyal. Whatever it may be, they definitely have more resilience than those other players. When we think about consolidation on our current environment, it really depends on the industry and how discretionary the goods and services are related to that industry are.

Cloud computing for example, is already pretty consolidated. It was special when it comes to public cloud infrastructure providers. There are four or so major players. As we explored, these types of companies become integral in company operations. It becomes very hard to switch away from them. In a stay-at-home economy, cloud computing is even more essential than it’s ever been. In this case, pricing powers still extends, but of course there are definitely boundaries. In this consolidation, in certain cases it might be more to untap existing synergies that haven’t been taken advantage of yet rather than to protect companies going under.

Some industries may have a tougher time even with pricing power and consolidation. Many consumer discretionary goods that don’t overlap with essentials or borderline staples will depend on disposable income. There’s no way around that most likely. Consolidation may help companies focus on the areas that are best positioned for depressed consumer sentiment. It helps to eliminate those that aren’t, but pricing powers, it will probably help those companies that have taken market share, but these segments are still likely to see greater elasticity in their products and services just due to decreased disposable income.

Jay Jacobs:

Great. Thank you, Andrew. I may have time for one more question. I know we’re kind of in bonus time there. It’s hard to choose between all of these strategies. How do you narrow it down to the next one or two years? Pedro, I’ll turn that one over to you.

Pedro Palandrani:

That’s good, Jay. Thank you. I’ll try to go fast here, but great question. I think it’s important to recognize that many of these strategies can actually be used together, be implemented together. In fact, I would say that it would be best to implement – to leave in a portfolio with many of these themes together. Usually, they overlapped. Tends to be very low between those themes, but like Andrew was talking about, these themes are converging and our reinforcement one another like – with the example, e-commerce were important reinforcing social media platforms or reinforcing a fintech solution. Why wait to do that, to implement that type of a portfolio of different themes is to probably look at the weight based on a sales growth.

If you look at forward or trailing sales growth estimates, the higher sales growth, the higher the weight should be. We believe this is important because just as Jay was mentioning when talking about the diffusion of innovation theory or the S shaped curve, sales growth is a great estimation of the adoption for these disruptive themes. Oftentimes, when you see a rapid acceleration, that could actually mean that the theme is growing from the innovators space to the early adopter space. Looking at sales growth make a lot of sense.

We actually have done this exercise here at Global X. Last year, we launched an ETF, the Global X Thematic Growth ETF the ticker is GXTG and we look at a – where we look at all the themes disrupting traditional sectors in our economy. Then selected and weighed these themes based on their sales growth. We applied that already and it’s proven to be a very good way to implement these theme-based solutions.

Jay Jacobs:

Great. Thank you, Pedro. That’s it for Global X. Thank you so much everyone for joining today. Hope everyone has a wonderful weekend. Stay safe and hope to see you the next time on our next webinar.


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