WELCOME TO THE THEMATIC ‘20s
No one saw this coming. When The Economist released its “The World in 2020” issue in November 2019, there were twelve prominent themes, spanning the U.S. elections to the Tokyo Olympics. There was concern over the global economy, but no mention of a global pandemic, quarantines or economic lockdowns.
The pandemic changed everything. The year 2020 became defined by themes such as remote work, stay-at-home orders and hopes of a sustained economic reopening that proved a conspicuous part of both everyday life and the financial markets. Assets under management in thematic funds grew by $72.5 billion in 2020, as investors looked for different approaches to position their portfolios in these unprecedented times. We believe that the use of themes for navigating different market conditions could be an increasingly prominent strategy over the coming decade.
- In 2020, dispersion within large cap U.S. equity returns reached 20-year highs, as leading companies greatly outperformed laggards in an economy shaped by pandemic-driven shutdowns. Much-needed monetary and fiscal stimulus pushed interest rates down and equity values in the broad indexes up, driven by higher multiples offsetting declines in earnings. Below the surface of the major indexes there was a different story, as some companies saw earnings go hyperbolic while others evaporated.
- Dominant themes of 2020, like cloud computing and e-commerce, decoupled from the S&P 500, with generous returns fueled by rapid earnings growth rather than irrational exuberance for some companies (1). Investors saw the most successful themes deliver market returns that outperformed the S&P 500 by double and even triple digits. However, we warn against characterizing many themes as bubbles and presuming what goes up must come down. Strong performance can persist for long periods of time, especially when there are strong underlying fundamentals.
- There are three thematic trades that we think investors may wish to consider, which are characterized as rerating, reopening and reversion. Rerating themes are typically characterized by exceptional earnings-driven returns that could be followed by multiple expansion next year, such as cloud computing and e-commerce. Reopening themes, such as industrial automation and infrastructure, may benefit from a vaccine and economic normalization (2). Reversion trades often include some themes that might have gotten overextended as multiples expanded and earnings shrank, like fintech and the internet of things (3). There are risks, as with any asset class, but we do not believe that weakness is likely to be driven by a change in the secular growth of the themes. Instead, near-term weakness would likely be driven by behavioral or policy catalysts.
1 When performance or financial metrics are discussed, cloud computing is defined as the ISE Cloud Computing Index and e-commerce is defined as the ProShares Online Retail Index. See the disclosure for more information.
2 When performance or financial metrics are discussed, infrastructure is defined as the Dow Jones Brookfield Global Infrastructure Composite Index and industrial automation is defined as the ROBO Global Robotics and Automation Index.
3 When performance or financial metrics are discussed, fintech is defined as the Indxx Global Fintech Thematic Index and the internet of things is defined as the Indxx Global Internet of Things index.
Originally Posted on January 25, 2021 – Expectations Shattered: Will Trends of 2020 Persist or Revert?
Investing involves risk, including the possible loss of principal. This information is not meant to be investment advice. There is no guarantee forecasts will be met.
Indexes are unmanaged, and one cannot invest directly in an index. Past performance does not guarantee future results.
Any forward-looking statements herein are based on expectations of ProShare Advisors LLC at this time. ProShare Advisors LLC undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Investing is currently subject to additional risks and uncertainties related to COVID-19, including economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and world economic and political developments.
For discussion of thematic fundamental and market performance: Cloud Computing is defined as companies in the ISE Cloud Computing Index; Software is defined as companies in the Bloomberg Americas Software Index; Internet of Things is defined as companies in the Indxx Global Internet of Things Index; Machine Learning/AI is defined as companies in the ROBO Global Artificial Intelligence Index; Industrial Automation is defined as companies in the ROBO Global Robotics and Automation Index; Cybersecurity is defined as companies in the Nasdaq CTA Cybersecurity Index; Remote Interaction Software is defined as companies in the Solactive Remote Work Index; Digital Payments is defined as companies in the Ecofin Global Digital Payments Infrastructure Index; Biotechnology is defined as companies in the Nasdaq Biotechnology Index; Genomic Medicine is defined as companies in the NYSE FactSet Global Genomics and Immuno Biopharma Index; E-commerce is defined as companies in the ProShares Online Retail Index; Gaming and E-sports is defined as companies in the Solactive Video Games & Esports Index; Social Media is defined as companies in the Solactive Social Media Index; Sustainable Food is defined as companies in the Foxberry Tematica Research Sustainable Future of Food Index; Pet Care is defined as companies in the FactSet Pet Care Index; Autonomous Driving is defined as companies in the NYSE FactSet Global Autonomous Driving and Electric Vehicle Index; Alternative Energy is defined as companies in the S&P Kensho Clean Power Index; 3-D Printing is defined as companies in the Total 3D-Printing Index; Defense & Aerospace is defined as companies in the BI North America Defense Prime Index; Infrastructure is defined as companies in the Dow Jones Brookfield Global Infrastructure Composite Index; FinTech is defined as companies in the Indxx Global Fintech Thematic Index; Water is defined as companies in the NASDAQ OMX US Water Index; Space is defined as companies in the S&P Kensho Final Frontiers Index; and Luxury is defined as companies in the S&P Global Luxury Index.
Information provided by ProShares and SEI Investments Distribution Co., which is not affiliated with ProShares. BR:2020-9167
Any forward-looking statements herein are based on expectations of ProShare Advisors LLC at the time. Whether or not actual results and developments will conform to ProShare Advisors LLC’s expectations and predictions, however, is subject to a number of risks and uncertainties, including general economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and other world economic and political developments. ProShare Advisors LLC undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Investing involves risk, including the possible loss of principal. This information is not meant to be investment advice.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
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