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How to Value Thematic Strategies


Head of SPDR Americas Research

  • This year, more than $30 billion has flowed into thematic ETFs
  • With all this interest, due diligence on the underlying exposures is necessary
  • Yet, which valuation metric is most appropriate to use when trying to formulate a fundamental view on areas of innovation?

Since the onset of the pandemic, there has been an evolution of behavioral changes that are not one-offs to our society, but transcendent trends that may impact future generations across a variety of different parts of our economy. While some of these trends existed prior to COVID-19, the pandemic has pushed the timing of the adoption of certain behaviors up by a few years – creating new future growth opportunities.

Naturally, this has spurred investor interest toward thematic ETFs that seek to provide exposure to some of these firms at the forefront of innovation in our new economy. This year, more than $30 billion has flowed into thematic ETFs – strategies focused on such areas of innovation as: Future Communication, Clean Energy, Smart Transportation, and Cloud Computing.

With all this interest, due diligence on the underlying exposures is necessary – as many of these strategies deviate from owning just large, mega-cap tech stocks and venture into smaller firms that are not as well known. One of the areas of analysis that has routinely come up is valuation, and in this blog, I will walk through which valuation metric is most appropriate to use when trying to formulate a fundamental view on areas of innovation.

Fundamentally thematic

Before we delve into the intricacies of valuation multiples, there is one caveat to mention: many of these strategies are within the “growth” category. In fact, out of the 145 funds we have identified as thematic, 124 have more than 50% allocated to “growth” stocks.1 Given that traditional growth stocks are trading above the 90th percentile across price-to-book, price-to-earnings, price-to-next-12-months-earnings, price-to-sales, enterprise value-to-sales, and enterprise value-to-EBIDTA,2 it would follow that these nontraditional growth stocks are also likely to end up in a similar “high-valuation-multiple” place.

But what metric to use? To answer this, we need to understand the type of firms typically found within these strategies. When performing a security look-through analysis, we find that many are concentrated in Consumer Discretionary, Health Care, and Information Technology sectors, as shown below. This is important, as the firms within those three sectors typically have a large amount of intangible assets on their balance sheets. And price-to-book is not the best metric to use when a firm has a high amount of intangible assets, as those assets are usually understated in a firm’s book value, and, as a result, that could inflate a firm’s price-to-book measure. However, one advantage of price-to-book is that it can be used with firms that have negative earnings – a trait that may be valuable in this exercise. Despite the latter feature, the high presence of intangibles leads to price-to-book not being a suitable metric for thematic strategies.

Average sector weights of thematic exposures

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1 Bloomberg Finance L.P. as of December 15, 2020 based on SPDR Americas Research calculations.
2 Bloomberg Finance L.P. as of December 15, 2020 based on the S&P 500 Growth Index based on data from March 1994.
3 An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets. Intangible assets exist in opposition to tangible assets, which include land, vehicles, equipment, and inventory.

Originally Posted on December 17, 2020 – How to Value Thematic Strategies


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