Horizons offers a new way to gain exposure to technology

Christian Charest: For Morningstar I'm Christian Charest. On Nov. 6, Horizons launched what it calls a new way to gain exposure to technology stocks, a new ETF called Horizons Industry 4.0. To talk about this new fund, I am here today with Mark Noble, Senior Vice President of ETF Strategy at Horizons.

Mark, always a pleasure having you with us.

Mark Noble: Great to be here.

Charest: So, can you start by describing the new fund. It's bit of an unusual concept.

Noble: It is, it's what we call a thematic ETF. So, a thematic ETF means that it's trying to invest in an idea or a concept rather than a sector. And in this case what we are trying to get exposure to is something called Industry 4.0, which is a new technology megatrend. And what it's doing is it's investing in the five key industries that underpin Industry 4.0, which is merging sort of the digital world with the physical world. So, we are talking about smart cars, smartphones, artificial intelligence. The key sectors and industries in that area are robotics, which includes AI, augmented reality, cyber security, big data and cloud data and of course the eponymous internet of things, which is when our fridges start talking to us.

So those are the key classifications, and we tried to create an ETF where it's equally divided into those areas to try to give you exposure to this really global, and I would argue, mega trend over the next 20 years where we are moving from this digital age to this merging of the digital with the physical age. So that everything around us is going to be disrupted. So, you can imagine that this is potentially a multi-trillion-dollar global economic trend. But trying to capture that by owning all the stocks of the world is difficult. So. we've tried to put our arms around and create an ETF that's kind of laser focused on this particular theme.

Charest: And what are some of the holdings in the fund, and how do they play into some of these sub-themes.

Noble: Again, its hard to know where this theme plays out. So, the stocks actually are all relatively small weights; it ends up being 50 stocks equally weighted across these 10 buckets. But some of them are household names. You've got Google, NVIDIA, AMD, Intel -- companies that are doing a lot of ground work in that area. But then you have a lot of companies that you may not know as well such as Akamai Technologies, Red Hat, Fortinet which is in the cyber security area. So, it's a mixture of all large cap companies. Some of them are established developers of this technology. Google certainly is a leader in data, augmented reality, AI, you name it. But then you have the companies in the background that are creating a lot of the data support and hardware support to allow for this development.

Charest: This is an index fund, not an actively managed one. Who decides on the holdings, and how are they picked?

Noble: Well this is always a difficult conundrum when you are developing an index. Do you go active and hire someone to go out and do this? What we generally find is that -- especially with emerging technology -- you want to be as diversified as possible, and a lot of times when you come from the indexing space your default is to index -- sorry in the ETF space your default is to index because it provides broad diversification. We really don’t know who is going to be the next Amazon.com or what is going to be the next Pets.com or PalmPilot versus Apple. So you want to be as broad as possible. So what happens is we wanted to provide an index solution where we are finding leaders in these industries using screens. We've been working with our index providers Solactive, and those screens just take those companies and equal-weight them in a bucket. Because what will happen is, if companies are successful in capturing this trend to the magnitude we think, they'll obviously start to move up in value and you are getting that broad exposure.

Charest: One issue that always comes up with thematic funds is that -- as you mentioned they invest in an idea not a segment of the market. So how can an investor integrate a fund like this into a portfolio that’s already diversified.

Noble: Right, well the first question is: Is this is an idea you want to buy into? And for this obviously we think there is a real value to this idea. But it is an idea where you are going to have some overlap with stocks you have, right? The FAANG stocks you may already have in your portfolio, and if you have any broad index exposure to S&P 500 or MSCI, you have exposure to some of those stocks. So, you have to make a call that this is something that’s going to fit into your portfolio, and what you need to understand is with any kind of emerging thematic idea -- and this doesn’t just apply to technology; things like marijuana, healthcare, some other big ideas we've seen coming, smart cars -- you have to then know that this is a high-risk, high-reward kind of area. Because we're investing on potential, not proven quantity at this moment. We think there is an extreme amount of potential. But you are looking at high valuations, because these companies are still in the early phase, and you are looking at a high amount of volatility.

Remember investing in internet stocks in 1998 it was great for two yeas and then it was not fun for the next decade. So therefore, this becomes a growth aspect of your portfolio in this case it'd be in your technology bucket and probably 15% to 20% maximum of that technology bucket. Understand that this is still speculative, it could become the single most important theme out there. But in the early stages this is obviously not something you want to completely put all your money into. You want to make sure you have that diversification and understand that this is a high-risk, high-reward proposition.

Charest: It almost feels like it should considered, more like an individual stock like a Berkshire Hathaway or a Power Corporation that invests in a lot of different areas and maybe combine that with other ETFs that are also thematic, build like a portfolio of ideas like this rather than a portfolio of sectors.

Noble: I think that’s a wonderful analogy Christian and exactly right, because what you are trying to do here is trying to capture a lot of global stocks. So, trading these stocks individually from an end investor perspective is very expensive especially when 40% of the portfolio is not in North America. So what we are really trying to do is -- you kind of hit the nail on the head -- is we are trying to give you a one-ticket solution to own this exposure. And you could own this or you could own Softbank which is a Japanese-based company that is also heavily invested in these areas. And that allows you to have this liquidity bucket and it does create a lot of cost efficiencies for you because the portfolio's being rebalanced for you and we are going out and buying those stocks, instead of you having to figure out how much to pay on bid-ask spreads and deal with liquidity issues. So it’s a very good way of looking at it. So yes it's almost like looking at it as one stock in your portfolio that gives you this one-stop exposure to this idea you really like.

Charest: Horizons have been launching several technology focused ETFs in the past year or so. Are there more thematic focused ETFs coming in the near future.

Noble: It's an interesting question, one of the things that we were looking at is do we launch all five of these industries? Already we launched one ETF and we have actually an industry sector ETF which is our RBOT ETF. So I think for now this is probably where we pause for the mean time. Because we think that what was happening is a lot of these industries that people are trying to invest in -- particularly cybersecurity and robotics -- they are all moving toward the same theme, and Canadians relative to other investor demographics -- particularly the U.S. -- are very underweight technology. So the idea of getting a one-stop solution I think right now appeals to them and then as you see some of these sub-industries start to really put their heads above the larger tech, maybe we look at more ETFs in that regard. I think for now we kind of feel like we have a pretty good impact on this space with blockchain, robotics and now sort of this more motherhood Industry 4.0 ETF.

Charest: That’s a lot of ground to cover in that field. Mark thank you very much for explaining all this to us today.

Noble: Always a pleasure, thank you.

Charest: For Morningstar I'm Christian Charest. Thank you for watching.