There are millions of dogs, cats, birds, fish, reptiles and other critters who are companions in people’s lives, and catering to these furry, feathered and scaled friends is a multi-billion-dollar global industry.
The ProShares Pet Care ETF (PAWZ) set to launch Tuesday hopes to cash in on this by tracking an index comprised of companies that generate a significant chunk of their revenue from pet care-related products and services. Given this product’s hyper focus, this could go down as a stroke of genius or just another gimmicky fund idea destined for irrelevance.
Obviously, ProShares is betting on the former.
“There are some powerful facts in this industry that are hard to ignore,” says Steve Cohen, managing director at ProShares, a Bethesda, Md.-based exchange-traded fund provider.
As cited in fund literature for PAWZ, roughly 68 percent of U.S. households have pets, up from 56 percent in 1988, according to the American Pet Products Association. Furthermore, 84.6 million households have pets versus 35 million households that have children. And pet owners are spending a lot of money to keep their animals healthy and happy. According to industry stats, pet care in the U.S. has grown twice that of GDP since 2007, and the global pet care industry is forecasted to expand from $132 billion in 2016 to as much as $203 billion by 2025.
Major corporations have identified pet care as a potentially profitable way to diversify their operations. A recent example was General Mills’ roughly $8 billion purchase Blue Buffalo earlier this year. Some analysts said General Mills overpaid for the maker of natural foods and treats for dogs and cats, and investors gave the deal a cool reception.
Nonetheless, General Mills joins a club that includes Colgate-Palmolive, the owner of Hill’s pet food products, and Nestlé, which acquired Ralston Purina in 2001 to form the Nestlé Purina PetCare Company, whose product line includes Friskies, Mighty Dog and Alpo. Nestlé, which earlier this year sold its slow-growing U.S. candy business, sees its Purina division as a growth driver.
“These are companies who don’t think it’s a fad,” says Cohen, who notes that both Colgate-Palmolive and Nestlé are constituents in PAWZ. Other companies in the portfolio include Idexx Laboratories and Zoetis, both makers of products for veterinarians, and PetMed Express, on online pet pharmacy.
Eight Subsidiaries
PAWZ tracks the FactSet Pet Care Index currently comprised of 24 holdings. Qualifying companies must generate at least $1 billion in annual revenue from one of eight pet care subindustries as identified by FactSet, a financial data company. Those subindustries are pet food manufacturing, pet supplies manufacturing, pet and pet supply stores, veterinary pharmaceuticals, veterinary diagnostics, veterinary product distributors, veterinary services, and internet pet and supply retail.
The modified market cap-weighted index is divided into Tier 1 companies (those that generate 50 percent or more of their revenue from pet care-related products or services) and Tier 2 companies (those that don’t meet the 50 percent threshold). Tier 1 companies comprise 82.5 percent of the index, with the rest made up of Tier 2 companies. The weighting of any single company is capped at 10 percent for Tier 1 and 4.5 percent for Tier 2.