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A Q&A between Jeff Spiegel, U.S. Head of iShares Megatrend and International ETFs, and Rusty Vanneman, Chief Investment Strategist for Orion Advisor Solutions. Orion is a leading model provider supporting more than 2,100 advisory firms with $1.3 trillion in assets under administration.1 Vanneman is responsible for leading CLS’s Portfolio Management Team and oversees all CLS investment operations, including investment philosophy, process, positioning, and performance.

Jeff: What first got you interested in megatrends?

Rusty:
Over the last ten years, global interconnectivity and open-source data sharing have provided companies worldwide with the ability to access and adopt the most cutting-edge sciences, innovations, and technologies within their field to compete on a global level.2 And even though that seems intuitive to us today, it’s a rather new phenomenon: over half of companies use open source data for commercial products.3 This access to shared information has dramatically broadened the competitive landscape to include companies of all market caps and geographies.

With this, the world has changed, and portfolios need to change with it. Part of the reason so many investors are unwilling to stay invested in the market is that they are still using the same sector, geography, and market cap vehicles they always have. As a result, they don’t know where to invest in the face of these long-term structural forces. Many industries are being disrupted and the companies within them are being disrupted unevenly: when things get too volatile in a specific segment of the market, many just move into cash, which obviously prevents long-term growth.

Jeff: Why build megatrend portfolios?

Rusty:
Well, exposure to megatrends over a long-term time horizon might be an attractive option for those investors. These vehicles can optimize for exposure to companies that have the potential to thrive in the face of the very disruptions that had previously pushed investors to the sidelines. Others may desire a more tactical approach and adjust the weights of individual themes according to idiosyncratic market catalysts to try to generate outperformance. How one uses them is simply a matter of preference.

Jeff: How do you define megatrends at Orion?

Rusty:
So, megatrends are long-term structural transformations that are occurring across the global economy. We’ve all seen them. They are the social, environmental, and technological drivers behind the fundamental shifts occurring in the market and they are fostering opportunities for companies to solve difficult problems in innovative ways.

Of course, each megatrend gives way to multiple subthemes: for example, electric vehicles and renewable energy are both working to combat the megatrend of climate change just as cybersecurity and AI are both working to support the megatrend of technological breakthroughs.

Jeff: Can you give an example of an opportunity that might merit more focus in the near-term?

Rusty:
Many long-term trends have been accelerated by the pandemic. Increased virtualization, as 42% of the U.S. labor force continues to work from home, has accelerated the production of media content and communications platforms while fostering a greater need for heightened cybersecurity spending.4 Genomics and immunology have seen explosive growth as biopharmaceutical companies worked to develop the first-ever mRNA vaccine to combat the virus.5 Robotics and AI have become critical in making the domestic production of PPE more affordable6 while low interest rates and a slowed economy are incentivizing companies and governments alike to make the shift toward renewable infrastructure.7

Jeff: What is unique about investing in this way with ETFs? Why build portfolios with ETFs at all?

Rusty:
Exchange traded funds are a highly transparent, liquid, and cost-effective way to access a set of specific companies that is rebalanced and reconstituted regularly. This allows portfolio managers to focus more on allocating to sets of companies rather than individual companies, offering greater exposure than a single stock selection approach.

To me, a megatrend ETF offers three unique features in a single product: 1) Exposure to long-term structural forces rather than short-term cyclical forces; 2) unconstrained access to specific themes that span across different sectors, geographies, and market cap sizes; and 3) a data-driven, bottom-up approach to stock selection and a weighting scheme unique to each subtheme. Adjusting your portfolio to optimize for thematic exposure can increase beta on trends that you’re bullish on and reduce beta on trends you’re bearish on. It’s a simple idea, but very hard to do through sector investing or individual stock picking these days.

Jeff: Can you touch on how the more active approach might work?

Rusty:
At Orion, we have conviction in the full range of megatrends and their subthemes. Where we think we can add value originates from our long track record of active investing. Being able to use megatrend products to express our in-house views where we are constructive can really help better reflect our near-term market convictions and long-term investment strategies.

We’re very excited by the prospect of using the megatrends suite to enact real, thematic exposure for our clients. So many of these trends defy the constraints of traditional portfolio metrics and it’s nice to have a suite of products to draw from in order to more adequately and easily express our views and manage our risk.

Jeff: At BlackRock, we’re already seeing increased interest from clients in gaining exposure to megatrends. What else should investors know about adding megatrends exposure?

Rusty:
Interestingly, many investors have tried to take a manual approach to accessing megatrends exposure for years. So, the demand has been accumulating for some time. A megatrend portfolio offers investors a turnkey solution to thematic investing, which has itself seen particularly high demand now amid the global pandemic — but not solely due to the pandemic: megatrends is among the fastest growing categories of ETFs in the United States; it grew 3x from January 2020 to January 2021, reaching a total AUM of approximately $120 Billion by the turn of the year.8 And I think we are still only seeing the start of it.

Like factor-based investing, the megatrend product suite is simply a new set of tools that investors can use to express their specific outlook. One’s time horizon and activeness with respect to investing will lead different people to use these in different ways; being able to adjust one’s portfolio thematical simply adds a new dimension to portfolio construction. Investors are beginning to realize this and that’s what is driving such tremendous growth.

Jeff: There are a lot of fads that come and go in the investments industry – what gives you confidence you aren’t building your business around one?

Rusty:
You’re right, there are a lot of fads in the industry. I know, I’ve been around long enough to see many of them fall in and out of favor. Active investing has been around for some time now, and megatrends are, by definition, long-term structural forces. The subthemes may ebb and flow with near-term catalysts — optimizing for those changes is where we believe we can add value. Still, the products themselves are geared toward providing exposure to forces that may take 10 years or longer to fully play out.

And though megatrends have garnered more attention as a result of the pandemic, that doesn’t mean all the juice has been squeezed out of potential future returns. Like I said, these are about long-term structural transformations that could take decades to fully play out. And I believe we are still very much in the early innings of these trends as well as consumer and investor adoption of these products.


Relationship Disclosure: BlackRock has entered into a contractual arrangement with Orion whereby BlackRock makes payments to Orion for platform and technology support, data and marketing. BlackRock is not affiliated with Orion Advisor Solutions.

Jeff Spiegel
Head of U.S. iShares Megatrend and International ETFs
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