Unpacking the new work-from-home ETFs


With interest rates still near historic lows and even the threat of negative rates looming, retirees, near-retirees or, indeed, anyone trying to save money in safe vehicles like GICs is experiencing the worst bout of “financial repression” in modern times. 

Increasingly, investors of all ages are having to relearn that, like it or not, “TINA” rules. That’s the acronym for “There Is No Alternative to stocks” if you want a portfolio to grow at least in line with inflation. 

But with the hope of decent long-term capital gains from stocks, not to mention dividend income, comes inevitable risk: a risk that has been revealed with the sudden sharp bear market that greeted the COVID-19 epidemic once it gained steam late in March.

Now that the pandemic seems to have entered a renewed and protracted second phase—if, indeed, the first one ever ended—investors may need to pay attention to the “Stay at Home” or “Work from Home” (SAH/WFH henceforth) stock theme that manifested after the initial COVID bear market hit.

Thus far, investors have enjoyed a solid recovery from the initial shock of March. How much depends on the extent to which they embraced the SAH stocks, and avoided those directly in the COVID-19 blast zone: airlines, cruise ships, hotels, office REITs and others directly affected by global lockdowns. 

Periodically the latter group rebound on renewed COVID optimism, and are hence dubbed “recovery” stocks. These have so far proven to be short-lived bounces: famously, the young millennial investors who flock to zero-commission trading services like Robinhood have even made money on battered recovery plays, assuming they get in and out nimbly enough.

But the V-shaped recovery expected by optimists seems now more elusive as major American states like Texas and Florida lock down again over a second COVID wave. That bolsters the case for a more long-term stance on SAH stocks like Zoom Video (ZM), DocuSign, Netflix and Teledoc (to name four I own and so far have profited from.)

Don’t forget the big tech companies like Amazon, Apple, Facebook, Google and Microsoft, all of which locked-down consumers rely on to keep a semblance of social interaction going with the outside world.

At least two WFH ETFs are in development to capitalize on this trend, more on which below. But by the time they are available, it may be a bit late: most of the names are obvious ones and can be purchased individually at full-service or discount brokerages. There are 100 (mostly U.S.) stocks in Jim Cramer’s COVID-19 index, which he created soon after the pandemic and bear market began. 

Cramer—host of CNBC’s Mad Money TV show—deserves credit for coming up with the FANG acronym (Facebook, Amazon, Netflix and Google). FANG has made money for anyone who got in within a reasonable timeframe, and some ETFs filched or enhanced the idea.  

Based on this chart, I’d say Cramer’s COVID-19 index has thus far earned its keep and kept investors out of stocks hardest hit by the virus. The 100 COVID-19 stocks include more than just WFH and FANG stocks: they also include pharma and biotech stocks working on a COVID-19 vaccine: Abbott Laboratories, Eli Lilly, Gilead Sciences, Johnson & Johnson, Moderna, Pfizer and Regeneron Pharmaceuticals.

Since we all need to eat, and cleanliness is paramount in the COVID age, there are also consumer staple giants like Campbell Soup Company, Clorox, Colgate-Palmolive, General Mills, Kellogg, PepsiCo and Procter & Gamble.  

Rising dependence on home-based technology is why the index includes

cloud and cybersecurity names like Adobe, Coupa Software, CrowdStrike, Salesforce and ZScaler. With sports and cinemas shut down, home entertainment is important, hence the inclusion of makers of streaming services from Netflix, Amazon Prime Video, Apple’s new Apple TV+ streaming services, or the Spotify music and podcasting service. It also includes video game makers like Electronic Arts and Take-Two Interactive. 

At some point we need to exercise—hence Peloton, makers of socially connected stationary bicycles and streamed workouts—or order food through takeout services like Chipotle or Domino’s Pizza. Those seeking to market crafts created by home-based businesses will use services like Etsy. 

Notice there are few Canadian names in the list, apart from Shopify. 

Using a “barbell” strategy

Should you consider playing the recovery and taking a flyer on the hardest-hit names like airlines and cruise lines? I don’t have the stomach for such risks myself, although Cramer has suggested a “barbell” strategy consisting of balancing both the COVID and recovery stocks. 

While I own a third of the COVID stocks, there’s little need to buy them all if you are invested in major indexes (like the MoneySense ETF All-Stars), which have a built-in barbell strategy. Another way is to find sector ETFs focusing on consumer staples, video games, semiconductors, pharma and biotech. 

If you’re late to the WFH party, be warned some of these names have already doubled, making them pricier and riskier than if you had acted soon after the index was unveiled. Therein lies the danger of buying the WFH ETFs, depending on when they are actually available.

At least two are coming. In the last edition of the ETF All-Stars, we suggested there may be a WFH ETF coming from Direxion, likely with the WFH ticker. Indeed, Direxion filed paperwork for this in April. It will have exposure to infrastructure used by cybersecurity, cloud tech, project management and online communication companies.  

Then in mid-June, the biggest ETF maker of them all—BlackRock, Inc.—announced it, too, is developing a stay-at-home ETF, although there are few details yet on holdings or fees. The iShares Virtual Work and Life Multisector ETF will focus on firms that benefit from the growing use of remote work, entertainment, education and wellness products. There are 75 companies in it, but my bet is it will resemble Cramer’s COVID index. If anything, there should be an advantage to buying the individual names before BlackRock’s comes out, as that is bound to increase demand for the ETF and inflate the value of these stocks even more.

That is, of course, assuming a vaccine doesn’t materialize sooner than later and obviate the need for such a theme. 

Jonathan Chevreau is founder of the Financial Independence Hub, author of Findependence  Day and co-author of Victory Lap Retirement. He can be reached at jonathan@findependencehub.com.

 

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