“There’s a term being used about zombies in your index,” Fortier says, referring to a list put together by Toroso Investments that identified 25 so-called “zombie” industries it believes have been fundamentally harmed by Covid-related changes in work and consumption habits. The roster includes airlines, resorts and casinos, travel services and various real estate-related sectors, among others.
“For every dollar you’re allocating to a traditional passive index, you’re allocating it to some of these industries or companies that either may underperform or not exist in its present form,” Fortier says. “One of the challenges of a traditional allocation approach is controlling that exposure to those 25 or so industries that will be a drag on performance.”
Moving forward, his plan of attack is to rely on his models’ rule sets that automatically adapt the portfolios based on market conditions. “I’ve coined the term ‘adaptive allocation,’ which I think is a pretty good description of what we do,” Fortier says.
He also posits that direct indexing is a way to avoid some of the potential performance drags caused by zombie industries. This method entails buying fractional shares of the companies you want in a certain index. “If you create these custom universes, you can apply this framework to the slivers of the market that I think represent the post-Covid market,” Fortier says.
Slivers, or sectors that fit that bill include artificial intelligence, cloud storage, cutting-edge health care and online payment-processing sectors. Fortier says certain ETFs tap into these trends, such as the Ark Genomic Revolution ETF (ARKG) and the WisdomTree Cloud Computing Fund (WCLD). He also cited ETFs tied to the online gaming business, as well as the ProShares Long Online/Short Stores ETF, which was up 39% this year through June 9.
“That speaks to the evolution of the ETF industry because it’s getting more innovative and that provides more tools in the investor toolbox,” Fortier says.
Don’t Be Complacent
Dan Weiskopf wears a couple of hats when it comes to investing: One involves his role as portfolio manager at ETF specialist Toroso Investments. The other entails his role as research strategist at the ETF Think Tank, which consists of roughly 600 members who share ideas about ETF investing, and whose participants range from large asset managers to solo registered investment advisors.
He notes the group in May held a conference call where they discussed some ETFs that seem well-suited for future trends. One was the ROBO Global Healthcare Technology and Innovation ETF (HTEC).
“It’s on the smaller side, but it’s interesting because it’s targeted at robotics and AI and the digitization of health care,” Weiskopf says. “We know we have to focus on health care on a global level, and this ETF captures that trend.”
He also spotlighted the SoFi Gig Economy ETF (GIGE), which Toroso Investments is the advisor on.
“When I look at the post-coronavirus environment, I’m looking at where I’m going to find the most innovation or maybe the most alpha,” Weiskopf notes. “And that sometimes comes from different access points.”
He suggests that investors take a barbell approach that aims to provide some portfolio protection via long positions in products that could go up when the market goes down. He believes a fund that fits that bill is the AGFiQ US Market Neutral Anti-Beta Fund (BTAL).