ProShares: New ETF Targets Transformational Change

[This ETF Industry Perspective sponsored by ProShares.]

Scott Helfstein is ProShares’ executive director of thematic investing and is one of the driving forces behind the ProShares MSCI Transformational Changes ETF (ANEW), which looks to capture the performance of the companies enabling paradigm shifts in how people work and live in the wake of the pandemic. From how we purchase merchandise, to how we handle a remote meeting or doctor’s appointment, to what we eat and how we acquire it, ANEW allows investors to benefit from those shifts. Here, Helfstein explains what makes the fund unique from other ETFs.

ETF.com: What drove the development of this fund?
Helfstein: ANEW grew out of the pandemic, but it builds on trends that were already in place. If we look at some of the other thematic areas that ProShares has gone into in the past couple years, such as pet care and retail disruption, the common theme is trying to take advantage of secular changes already in place.

What was clear early in the pandemic was how consumer behavior and corporate behavior was changing in dramatic ways. The goal was to identify companies that are leading or adapting to these changes. Consumer change sits at the core of our concept of transformational change, in that it's drastic and it moves in one direction. It may be unlikely that these trends reverse to go back to the way things were.

Changes in the way people work, take care of themselves, consume and connect were already unfolding. The fourth industrial revolution was contributing to mobile workplaces and more automation. The food revolution, where if UN projections are correct there will be 2 billion more people to feed by 2050, was already in motion. Things like retail disruption, where we saw the rise of online retail and the relative decline in brick-and-mortar retail accelerated in 2020. E-commerce retail penetration went from 11% to 16%. It took 10 years to go from 4% to 11%, and it took three months to go from 11% to 16%, accelerated by COVID-19.

Those are the types of behavioral changes that we were focused on—those that were in place, but got supercharged.

ETF.com: How did you arrive at the four categories that the index covers?
Helfstein: Think about how we’ve spent our time, particularly over the past nine months of COVID-19. If we're fortunate enough, we spent it working. We spent it taking care of our health. We ate, we communicated with loved ones, and with the little bit of time left, we engaged in some sort of leisure activity. In many ways, the themes of ANEW are personal or relatable for people. They are things that we have experienced in the past months. Future of work, genomics and telehealth, digital consumer and food revolution are reflections of how we spend our time.

Those are areas experiencing both disruption and innovation. The types of companies operating in these business segments could change and will continue to evolve, but ultimately those four categories may represent evergreen, persistent trends that will potentially carry forward into the future.

ETF.com: Can you talk about how the Relevance Score works, and the role it plays in the methodology?
Helfstein: Part of that is proprietary to our partner and ANEW’s index provider, MSCI. The process begins with deep research that took place over many months to understand the macro environment and where growth opportunities could manifest. The index construction behind ANEW involves identifying companies with revenues that are closely tied with the four transformational themes, and the relevance score is just a way of ranking fundamental alignment. The selection process starts with the roughly 9,000 companies in the MSCI ACWI universe, and the final index currently has just over 140. The index goes beyond simply what the companies are saying they're doing to trying to identify where they are generating thematic relevant revenue.

ETF.com: What are some of the companies that are in the index? How would you describe them in general terms?
Helfstein: There are companies, the fancy “well-known” stocks, drawing people's attention. And then there are ones that sit under the surface and reflect the longer-term trends.

Many of us spend an inordinate amount of our time on conference calls, and particularly videoconferences. Videoconferencing has been around for a long time, and yet here we are finding ourselves adopting it at a much more rapid rate. Zoom, for example, is one of those companies that a lot of people are talking about. However, working from home and remotely, we also should be thinking about endpoint connectivity—the process of building secure tunnels to remotely connect users to networks. Many people may not be familiar with a company like Zscaler, which is also an index holding, but it helps to facilitate the secure connectivity that has become increasingly critical to the way we work today.

In food revolution—which we think is a potentially unique and underappreciated story—there is a company like Beyond Meat, which saw business accelerate in 2020. Part of that success is based on health trends driving the adoption of plant-based protein, but part of it was based on the supply shock that we saw during coronavirus, when a number of meat plants needed to close down. Beef costs, measured by spreads from production to retail, went up by 50%. It's actually the largest increase in price spreads the USDA had ever recorded. Markets were having trouble sourcing product. That pushed people who might not have otherwise tried a plant-based protein to do so. That's something people can associate with right now.

Within each category, we see these companies that may be well-positioned for the pandemic environment we’re experiencing today, as well as the longer-term transformational changes in the global economy.

ETF.com: How would you characterize these companies in terms of style and size?
Helfstein: One of my favorite ideas is that thematic investing should smash the style box. That's the point. That's the bread and butter, and that's where it should live. If you want to own something like cybersecurity, a component of the future of work theme, or you want to own robotics, do you just want to own the large caps? Probably not, because what you're getting in the safety and security of a larger company, you're probably giving up in growth, which is why you invest in smaller companies as well.

Similarly, when considering traditional valuation metrics, companies with these thematic tail winds may have higher growth prospects and command a higher multiple. If you simply populate a portfolio with those companies only, then perhaps you're overpaying. But again, the benefit of having many companies across a single theme—in this case transformational changes—is that you're hopefully also capturing some of those that are underappreciated by the market. A diversified thematic index should capture companies that would range from large to small and growth to value.

ETF.com: What role do you expect ANEW to play in investor portfolios?
Helfstein: Often when we talk about thematic investing, there is a mindset toward core-satellite. Investors have a core allocation—say, your 60/40, equity to fixed income—and then beyond that, with additional capital, people can look to achieve a little bit of extra alpha or outperformance. Certain investors could use ANEW in a core-satellite structure; for others, ANEW could be a potential substitute for a growth equity sleeve as a core holding. At its heart, these companies are growth companies if we think about the revenue projections or addressable market size estimates. In many cases, we're talking about market growth of 10%, 20% or 30% across many of these areas. Rather than own a more diversified portfolio of the Russell Growth Index, where you're getting 400, 500 names, this gives you a lot of the same characteristics with a more concentrated growth profile.

ANEW could very easily sit in a satellite structure, but it could also be a reasonable consideration for your growth equity piece in the core.