The societal shift to remote work has sharply increased the valuations of some companies' stocks.UberImages/Getty Images/iStockphoto
The trend toward remote working, learning and living under lockdown to contain the spread of COVID-19 has highlighted a relatively new exchange-traded-fund theme that includes everything from cloud computing and cybersecurity to online document management and remote communications.
There’s even a specific work-from-home (WFH) ETF about to hit the market – the Direxion Work From Home ETF, which tracks the newly launched Solactive Remote Work Index. The ETF will trade in the U.S. under the ticker WFH.
When the fund starts trading in the coming weeks, it will be among a growing list of ETF options for investors looking to capitalize on the remote-working boom. And while some employees are starting to return to the office, experts believe the WFH trend will continue long-term, powered by new technologies.
“There are a lot of companies out there that are actively benefiting from the pandemic,” says Hans Albrecht, vice-president and portfolio manager at Horizons ETFs Management (Canada) Inc. “The whole idea of digital transformation has been turbocharged by COVID-19.”
The lockdown has hastened a technological shift coming for some time, Mr. Albrecht says, and put the spotlight on companies advancing the so-called Industry 4.0 shift, intended to bring greater industrial productivity.
“Digital transformation is no longer a slow-moving choice; it may be a must-do to survive for many businesses,” Mr. Albrecht says. “The need to get on board the digital train is no longer a nice-to-have.”
Horizons has a number of smaller ETFs that play into the WFH trend. Its Horizons Industry 4.0 Index ETF (FOUR-T) holds 50 stocks in cloud computing, cybersecurity, virtual and augmented reality, robotics and the Internet of Things. FOUR has assets under management (AUM) of about $7.8-million, a management-expense ratio (MER) of 0.71 per cent and has returned about 10 per cent year-to-date. (All data from Morningstar as of June 8.)
The Horizons Big Data Hardware Index ETF (HBGD-T), with an AUM of about $4.5-million and an MER of 0.71 per cent, invests in 40 names including cloud services, data centres and semiconductors. It has returned about 10 per cent so far this year.
Linda Zhang, CEO of Purview Investments, a portfolio-management firm in New York focused on ETFs with an environmental, social and governance angle, says that WFH funds like Direxion’s should have “lasting investment power.”
The principles espoused in the WFH trend are “pretty healthy” for society as a whole, Ms. Zhang says.
“Working from home, or working from anywhere, allows a continued shift in corporate culture to better work-home balance with less travel, less congested roads and less pollution,” she says. “It’s a pretty compelling investment thesis.”
Many existing ETFs already reflect some or most relevant WFH themes such as cybersecurity, cloud software, e-commerce and e-entertainment, she notes, including the Horizons Robotics and Automation Index ETF (RBOT-T), Ark Industrial Innovation ETF (ARKQ-A) and the recently launched Truemark Technology AI & Deep Learning ETF (LRNZ-A).
Ms. Zhang cautions that such thematic ETFs can be volatile but have shown resilience during the pandemic. She also notes that valuations are high for some technology companies in the space.
But are they too high for investors to get in now? “If you’re looking for years of investing and not a tactical trade, you can think about going in at any time,” Ms. Zhang says.
Daniel Straus, vice-president of ETFs and financial-products research at National Bank Financial Inc., says the WFH-investing trend is a prime example of subsectors that “are a real breeding ground for thematic investing… There are all kinds of ways to divide them.”
Mr. Straus notes that the ability for employees to work remotely was considered a “key trend” even before the pandemic hit, but “we’re standing at a cultural crossroads now.”
The new Direxion fund “mixes and matches some pre-existing themes,” he says, adding that there are "dozens, if not more, ETFs that offer you exposure to a piece of this.”
While the performance of WFH-style ETFs has been impressive, Mr. Straus says a concern is whether a company’s future growth prospects are already priced in – and if they can continue to advance.
“There’s no question that there are companies in these indices that have had their prices rocket to enormous levels, but they provide a valuable service that would seem to be entrenched in future possibilities,” he says.
For instance, he says cybersecurity ETFs like the Evolve Cyber Security Index Hedged ETF (CYBR-T), have consistently delivered high performance with each major headline about a data breach. The ETF has returned about 20 per cent so far this year.
While these are “sentiment-driven returns,” he says, “the market has continued to reward it time and time again.”
Mr. Straus suggests that investors in WFH funds should see them as speculative, although “there are a lot of tailwinds behind this theme.”