ETF Expert Corner

A Conversation with Global X’s Jay Jacobs on Thematic ETFs

June 13th, 2017 by ETF Store Staff

Jay Jacobs, Director of Research at Global X, offers his perspective on thematic investing and spotlights several Global X thematic ETFs (BOTZ, SOCL, & PAVE).

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You can listen to our interview with Jay Jacobs by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: We're focusing on thematic ETFs today and we're now very pleased to be joined by Jay Jacobs, Director of Research at Global X. Global X currently offers close to 60 ETFs. Those ETFs have over $5 billion invested in them. Global X is certainly a leader when it comes to thematic investing. Jay is joining us via phone today from New York. Jay, as always, great to have you on the program.

Jay Jacobs: Thanks for having me.

Nate Geraci: Jay, we're going to highlight several thematic ETFs today, but before we do, I'd love to hear your take on the value of thematic investing. First, how do you define thematic investing, and then second, why is it important in the context of a portfolio?

Jay Jacobs: We define thematic investing as identifying powerful macro level trends and then the underlying investments that stand to benefit from the materialization of those trends. If we think about it, it's actually a very intuitive style of investing, because many investors are already doing this to some extent in their portfolio. The example I like to give is rising interest rates. Many people have been organizing their portfolios, trying to orient them around a secular long-term trend of interest rates rising from basically zero to some higher value going forward. They might look at bank stocks. They might look at other sectors that have been positively correlated to rising interest rates. What they're doing is they're looking at a macro level theme, in this case one related to monetary policy, and then identifying investments that stand to benefit from the materialization of that trend. What we've done at Global X is we've launched a lot of products over the last few years that don't focus so much on monetary policy, but we've looked at people and demographics, so changing consumer habits and changing demographics around the world. We've also looked at technology, so exponential technologies that are really starting to disrupt or even create entirely new sectors of the economy. The reason why we like this is we're in a world where we've obviously had a fantastic bull run in the US for eight, nine years now. When you look at expectations of forward returns, people are pretty bearish. Valuations are high. Growth in the developed markets is fairly sluggish. A lot of that is being caused by low birth rates and shrinking workforce participation. That creates a problem where people have historically counted on 7%, 8% return on equities for their retirement, and we might be in a world where it's 3% or 4%. How do you find that growth for your portfolio? We think thematic investing is one way of really targeting these higher growth segments of the economy that could still really generate a lot of growth, even if the broader economy is in a pretty sluggish phase for the next decade or so.

Nate Geraci: Jay, before we look at a few Global X thematic ETFs, just at a high level, why do you think ETFs are a good delivery vehicle for thematic investing?

Jay Jacobs: We have to look at how people did thematic investing in the past. If you believed in a theme and had a lot of conviction about it, let's take social media for example, most people would do some research on social media, they would pick a handful of companies that have high exposure to the theme, and they would buy those. What are they missing in that scenario? One, people are not going to be very diversified. They probably pick only a couple of companies. That means you're taking on a lot of company-specific risk. You could get the theme right, but the company could get it wrong. You know, social media could entirely take off, but that one company you picked might just have been a bad horse to bet on. The second thing is that a lot of these themes are global in nature. If you look at what an individual might do on their own, it's easy to buy US stocks, not so easy to buy Japanese stocks. A robotics theme, for example, is almost 50% invested in Japanese stocks, so if you don't have the ability to purchase those, you're missing out on a very big part of the theme. When you wrap it into an ETF, what you're essentially doing is kind of outsourcing that research on the theme to figure out which companies are involved in it, but through that portfolio management aspect of getting really diversified exposure around the world.

Nate Geraci: Our guest today is Jay Jacobs, Director of Research at Global X. Jay, let's walk through several thematic ETFs from Global X. You just mentioned the robotics theme. Let's start with the Global X Robotics and Artificial Intelligence ETF, ticker symbol BOTZ. By the way, you guys have just some fantastic ticker symbols on your ETFs. You know, we actually spent quite a bit of time on this subject of robotics and automation last week. I think this is just an absolutely fascinating area. What does this ETF seek to do and how does it compare to the small handful of other ETFs offering exposure to this space?

Jay Jacobs: This ETF is doing exactly what's in the name. We're looking for exposure to the robotics and artificial intelligence theme. The approach that we take is global in nature. We're looking at companies in the US and Europe and Japan, and we're looking for very high exposure names. You'll notice our portfolio has about 28 holdings. We're looking for those names that really are almost entirely involved in the robotics space. It's a bit difficult because if you look at robotics and artificial intelligence, there are some very large companies out there that are involved in this space, but if you look at their revenues and the percentage of revenues they get from robotics or artificial intelligence as a portion of kind of their whole company, it can be very small. We don't want those companies. We want the companies that are really focused on robotics and artificial intelligence, because in thematic investing, having a high beta to that theme, or really pure play exposure to that theme, is really important for getting the outcome you're looking for. We break it down into four different segments of robotics and artificial intelligence. The first is industrial automation. That would be robotics companies that build machines for car manufacturing, for example. The second component we look at is non-industrial automation. One of the fastest growing areas in the non-industrial space is robots used in healthcare. Increasingly, surgical robots are conducting surgery on patients for better outcomes. The third group we're looking at is drones and unmanned vehicles. I think that's fairly self-explanatory. The fourth bucket is artificial intelligence, so pure play companies that are helping with things like processing big data, or one of the themes I like these days is robotic vision. We're really kind of taking a robotic machine and giving it the ability to see and process the space around it.

Nate Geraci: Jay, for investors considering the broader investment thesis here, at the Global X website, you have a nice write-up on the potential of robotics and artificial intelligence. There are two current examples given, one of a Japanese factory that's been running in lights-out mode for more than 15 years. In other words, there are no humans involved, and the paper talks about how plants like this can manufacture everything from electric razors to other robots. Then there's also an example of IBM's Watson computer - which I found this amazing - it can actually generate sports highlight reels by analyzing crowd noises and player gestures. Is there anything that won't be automated in the future?

Jay Jacobs: The big shift that's happening right now, and I alluded to this a few minutes ago, is this concept of robotic vision. Robotics have actually been around for a few decades, and I think most people don't even fully appreciate that. The concept of a robot picking something up and putting it down in another place in a very programmatic way is very simple, and that's been around basically since semiconductors were widely available. What's happening now, and why it kind of seems like we're at this big inflection point in robotics and artificial intelligence, is we're combining that machinery with the software, with that artificial intelligence, that now kind of frees the robot to do more things. It doesn't just have to pick up a piece of metal over here and put it over there. It can actually start to look at different pieces of metal, and decide which one is the correct one, and where to take it, and where to place it, and how to weld it within the context of a broader machine. Suddenly we're getting this really kind of exponential change in the capabilities of robotics because of the increasing power of software. I think there are certain industries that are really going to start to benefit from that change immediately. We're going to see much higher productivity growth in certain areas of manufacturing. But you really look at this theme, and one of the reasons why it's so powerful is it's not limited to one sector. It's not just manufacturing that's going to see the introduction of robotics. It's going to happen in healthcare. It's happening in agriculture. It's happening in military and defense. It's really a very broad-reaching theme.

Nate Geraci: We're visiting with Jay Jacobs, Director of Research at Global X. Jay, on the subject of artificial intelligence, one of the biggest developers and users of AI is actually social media companies. Another thematic ETF that Global X offers is the Global X Social Media ETF, ticker symbol SOCL. Tell us a little bit about this ETF - and I'm curious, even though social media companies have obviously grown significantly over the past several years, why might social media be an attractive investment opportunity moving forward?

Jay Jacobs: The Global X Social Media ETF, we launched this around five years ago, so this is a theme that's continued to grow over time. The reason why we like this in an ETF is we're providing access to the global social media space. Many investors in the US are very focused on those huge names in the US that they use and their kids use, but what people are missing is that in a lot of markets outside of the US - in Japan, China, Russia - they each have their own social media companies that have these very strong monopolies over social networking. Not including those companies is actually missing a big part of the social media opportunity set. The reason why we think it's important to have this broad exposure is I think about a few years ago, people have talked about social media companies as having these kind of localized monopolies. If you were in photo sharing, you were in photo sharing. If you could kind of own that space, no one really competed with you. If you were in microblogging, you owned microblogging, and no one competed with you. What's happening now is these social media companies are growing more and more and more, and they're starting to really kind of bump up against each other in different areas, whether it's in video, photo, blogging, et cetera. Frankly, that makes it very difficult to pick who's going to be the winner 10 years from now, but what we do believe is, regardless of who's the winner in these companies, the industry is going to grow very quickly. Why do we think that? As you said, they're big users of big data and artificial intelligence. They can do very hyper-targeted ads, finding the right message to the right person at the right time. That's a very difficult task for traditional media companies. They also enable micro-campaigns. They enable a pizza shop on the corner to do advertisement, something they never could have thought of years ago when newspapers, TV, or radio would have been too expensive for them. The third point is that they're targeting probably the most desirable demographic, which is the young millennial population which is seeing a lot of growing spending power and very big consumers. You kind of wrap those things together, and social media is a really kind of new type of advertising vehicle that's really just kind of getting started in its growth. We see a lot of potential going forward.

Nate Geraci: One other thematic ETF I did want to be sure to ask you about was the Global X US Infrastructure Development ETF, ticker symbol PAVE. Again, another great ticker. I selected this ETF because I thought it was very timely. Obviously, the need for improved infrastructure was talked about all through the presidential campaign last year. It's only garnered more attention since Trump was elected president. As a matter of fact, last week was actually dubbed "infrastructure week" by President Trump. We're still waiting on all of the details, but this does appear to be a focus. How might PAVE benefit from a meaningful infrastructure spending package getting through Congress?

Jay Jacobs: When we launched PAVE and sort of started to develop it, what we realized was, yes, everyone's talking about infrastructure. It's actually probably one of the only things in Washington that has bipartisan support right now. Democrats and Republicans both believe we need better infrastructure in the United States. Anyone I've talked to in my life has complained about their commute, whether the train was late, whether there were delays, whether there's potholes. I think the approval rating of spending more money on infrastructure is very high right now, but the problem is, when you look at a lot of infrastructure funds, first off most of them are global. They're kind of diluting some of the US infrastructure theme by being that broad. Secondly, they're owning the owners and operators of infrastructure. If you look at the US, we're kind of different from the rest of the world in that we don't have a lot of privatized infrastructure. What we do have that's privatized are energy pipelines, telecoms, and utilities. That's about it. Airports, seaports, toll roads are really not that popular in the US as a privatized vehicle. What that means is, if you want to invest in infrastructure, you're really kind of getting a very small exposure to it in the United States, either because you're looking global or you're only looking at a few segments of infrastructure on the private markets. What we realized was, rather than looking at the owners and operators of infrastructure, we should look at the builders and developers of infrastructure. This would be construction and engineering companies, transportation companies involved in raw materials, heavy machinery leasing companies. These companies stand to benefit whether you build a new pipeline, whether you build a new road, whether you build a new waterway, et cetera. We're kind of going upstream to get that higher sensitivity to the infrastructure theme, because really kind of looking at existing assets in the infrastructure space is really thin in the United States.

Nate Geraci: Jay, we have just a few minutes left here and before we let you go - going back to thematic ETFs as a whole, I know Global X recently conducted a survey that showed, compared to other generations, millennials are actually most interested in thematic investing trends. To close here, why do you think that is and how do you expect the ETF landscape to evolve given that interest?

Jay Jacobs: The millennials are maybe the enigma of the financial world, as everyone's trying to figure out how they're going to invest. The reason why is, millennials, they're expected to see their incomes massively shoot up over the next couple of decades. Some estimates say they'll be 75% of the workforce by 2025. Secondly, they're set to inherit trillions of dollars from the baby boomer generation. They're not just going to be big consumers, but they're going to be big investors as well. Everyone's trying to figure out, how are they going to invest? What do they care about? What we've seen in our survey is that, by and large, millennials care more about thematic investing. If you look at it from a thematic perspective, the way we've been defining it just now, sort of these exponential technologies or these people and demographic trends, but also if you look at it from a values perspective, so more on the ESG side as well - we've seen millennials are much more likely to care about making their investments socially responsible, or in looking for companies that don't pollute or have progressive social policies. What that means for the ETF industry is, I think as millennials continue to inherit money to build up their own wealth, we're going to see more products in the space that are really catering to that generation.

Nate Geraci: Jay, as more products come to market, and you talk about ETF proliferation as a whole, any parting words of wisdom - whether it be millennials or any investor - in terms of sifting through the thematic ETF landscape?

Jay Jacobs: We use three tests to decide what a good theme is. The first test we use is, do you have high conviction in that theme happening? You need to believe in that theme, because if it doesn't play out the way you expect it to, that's not going to prove out to be a good investment. The second thing we look at is, is it investable? Maybe you have a great theme. The example I like to use is space exploration. Maybe that's the big theme, but it's not really investable in a public market sense. It's really hard to build an ETF that's going to have high exposure to that theme. Then the third thing we look at is time horizon. Is this going to play out in a very short time frame or something that's decades, or perhaps even evergreen? The longer that time horizon, the less it takes market timing skill, and the more it's really just focused on selecting the right theme. If you can look at a theme with a high degree of confidence, it's investable, with a long time horizon, we think those are really the keys to success for thematic investing.

Nate Geraci: Jay, with that, we'll have to leave it there. As always, just a tremendous discussion today. We certainly appreciate you joining us on the program. Thank you.

Jay Jacobs: Thanks for having me.

Nate Geraci: That was Jay Jacobs, Director of Research at Global X. If you would like to learn more about the entire Global X ETF lineup, you can do so by visiting globalxfunds.com.