The remote-working boom brought by the COVID-19 pandemic created a new investment theme in 2020: exchange-traded funds offering a portfolio of stocks expected to benefit from the work-from-home (WFH) trend.
While some feel valuations for these ETFs are too high given the big gains of 2020 and as vaccines bring people back to their office in the months ahead, others believe the continued shift in work habits and lifestyles, as well as coming technologies like 5G communications, will support the WFH trend long term.
Hans Albrecht, vice-president and portfolio manager at Horizons ETFs Management (Canada) Inc., sees “two worlds colliding.” The first is technology, including cybersecurity that brings a “never-ending revenue stream” and cloud computing, which he likens to a utility with “massive growth potential.” The second is the productivity and efficiency benefits that technology brings users, including away from the office.
“All COVID did was accelerate all that,” Mr. Albrecht says.
Several ETFs from Horizons did well in 2020 by playing into the WFH trend, particularly focused on the “nuts and bolts” behind it, he says, such as digital data and semiconductors.
These include the Horizons Industry 4.0 Index ETF (FOUR-T), which holds stocks in cloud computing, cybersecurity, virtual and augmented reality, robotics and the Internet of Things. It has assets under management (AUM) of about $12-million, a management expense ratio (MER) of 0.71 per cent and returned about 48 per cent over the past year, according to total return data from Morningstar as of Jan. 13.
The Horizons Big Data Hardware Index ETF (HBGD-T), with an AUM of $11-million and MER of 0.71 per cent, is up more than 150 per cent over the past year. It’s highly exposed to storage, cloud and digital REITs (which own land that hosts servers that enable cloud usage for companies), Mr. Albrecht says. It also owns crypto and blockchain equities that are the building-blocks of cryptocurrencies.
New U.S. ETFs that are even more directly linked to the WFH phenomenon hit the market in 2020, including the Direxion Work From Home ETF (WFH-A) and the iShares Virtual Work and Life Multisector ETF (IWFH-A).
The Direxion fund, which tracks the Solactive Remote Work Index with holdings vastly in technology and communications, has an AUM of US$146-million and MER of 0.45 per cent. It has returned more than 30 per cent since it debuted in June last year.
Meanwhile, IWFH from iShares, launched at the end of September, tracks the NYSE FactSet Global Virtual Work and Life Index. It comprises companies that provide products, services and technologies that allow for remote work and support a virtual way of life across entertainment, wellness and learning. With an AUM of US$6.2-million and MER of 0.47 per cent, it has returned 14 per cent in the past three months.
Daniel Straus, vice-president of ETFs and financial products research at National Bank Financial Inc., notes that the iShares fund draws on even more elements of the “home-bound economy.” An example is names like Peloton Interactive Inc., the exercise equipment and media sensation that has seen massive demand during the pandemic.
Mr. Straus notes companies like his own were on a trajectory before the pandemic struck of designing “hotelling” spaces and “hot desks,” where staff work both at the office and at home. The trend is “now spreading to a wide swath of the corporate world,” he says. “The pandemic, if anything, has given it a kick in the pants.”
He believes ETFs with companies that “enable” the WFH trend could be a good counterweight to holdings like commercial real estate found in many Canadian portfolios if this lifestyle shift continues.
David Kletz, vice-president and portfolio manager at Forstrong Global Asset Management Inc., says his company for some time has been leaning toward a hybrid model for staff to spend some of their time working remotely. But he doesn’t feel that this behavioural shift will bring significant gains in WFH-focused ETFs in the next year or two.
Instead, the quick work on the development of the COVID-19 vaccines has shown that “there is an end in sight” to the pandemic and that the “real economy” will reopen, despite current surges and continued lockdowns, Mr. Kletz says. This has meant a shift from “COVID winners” like technology to “COVID losers” like the industrial and financial sectors, which will benefit from what he calls a “back-to-work trend” and pent-up consumer demand.
As a result, Forstrong is going long on U.S. funds such as the Industrial Select Sector Spider ETF (XLI-A) and the Financial Select Sector Spider ETF (XLF-A). It’s also investing in ETFs focused on Europe, especially Sweden and Poland, which are expected to benefit from the post-pandemic global economic expansion.
Mr. Kletz allows that “things will never go back totally to where they were before,” which means that ETFs based on the WFH theme make sense for long-term holdings. “But those stocks have been well-rewarded over the past year,” he cautions. “There are better opportunities to play the other side of that trade for now.”
Mr. Albrecht says growth areas like WFH technologies “have very, very long runways,” but points out that “this is a volatile sector and they’ve had a really great run.” Nonetheless, he doubts there will be a wholesale move back to the office – and away from WFH investments – when the crisis ends.
“Companies are not going to un-learn valuable lessons from COVID,” he says, pointing out that giants like Facebook are adopting a work-anywhere policy for some staff. Mr. Albrecht predicts that the future will combine what he calls the “dude-working-at-home-freelancer-world” and the office-worker world. “Working from home is only going to continue.”