Direxion has launched a thematic equity ETF that invests in companies considered to be uniquely placed to capture the ongoing shift of consumer habits and activities online.
Dave Mazza, Managing Director and Head of Product at Direxion.
The Direxion Connected Consumer ETF (CCON US) has listed on NYSE Arca and comes with an expense ratio of 0.45%.
The ETF offers an alternative approach to many of the existing funds tapping into the online consumption theme which tend to focus more narrowly on retail e-commerce companies.
By contrast, the fund’s strategy revolves around firms providing home entertainment, education, healthcare, or social interaction services through digital channels.
CCON is the second ETF from Direxion that is specifically designed to capitalize on trends that have been appreciably accelerated and, moreover, are expected to endure as a consequence of the Covid-19 pandemic.
The issuer’s first ETF to tap into this theme was the Direxion Work From Home ETF (WFH US) which has already accumulated $90 million in AUM since its launch in June.
David Mazza, Managing Director at Direxion, said, “Like the trend toward greater adoption of remote work, we’re witnessing an acceleration in the interconnectedness of our day-to-day lives. CCON meets the demand of investors looking to gain diversified exposure to firms providing the services and technologies to help revolutionize home entertainment, enable the scalability of remote education, allow people to lead healthier lives, and keep the world connected, even when apart.”
Methodology
The fund is linked to the Solactive Connected Consumer Index which selects its constituents from a universe of US-listed equities and American Depository Receipts (ADRs) of companies with average daily trading volumes of at least $5 million. Firms classified by FactSet under the ‘Media Conglomerate’ or ‘Major Telecommunications’ industries are not eligible for the index.
Security selection is driven by Solactive’s proprietary Natural Language Processing engine called ARTIS (Algorithmic Theme Identification System) which provides potential constituents with a thematic score indicating how closely aligned the firm is to an underlying theme. ARTIS analyses large volumes of company reports, financial news, and business descriptions in calculating thematic scores.
The index contains 40 constituents, consisting of the 10 stocks with the highest ARTIS scores relevant to each of the following four sub-themes: home entertainment, online education, remote health and well-being, and virtual and digital social interaction.
Stocks are equally weighted in the index which is reconstituted and rebalanced on a semi-annual basis. Buffer rules help to limit unnecessary turnover – a new company will only be added to the index if it ranks fifth or higher within its sub-theme, while an existing company will only be removed if it drops below the twentieth rank.
Timo Pfeiffer, Chief Markets Officer at Solactive, commented, “The release of the Connected Consumer ETF consolidates Direxion’s reputation as an innovator in the field of thematic ETFs. Our everyday lives circle around mobile devices and connectivity, and I cannot think of many other contemporary inventions that have shaped our lives more drastically. Since individuals are no longer bound to local presence, mobile and virtual interconnection will contribute crucially to people’s freedom. Our Solactive Connected Consumer Index reflects this current trend.”
Long-term, pervasive trends
According to Direxion, while Covid-19 has caused significant short-term disruptions to our living and working conventions, these trends are also expected to persist as individuals adjust to a new normal after the pandemic.
The four technological pillars (home entertainment, online education, remote healthcare, and digital social interaction) were chosen as the base for the ETF because the trend to online consumption within these segments was already well underway before the pandemic and has accelerated amidst the crisis.
Within home entertainment, Direxion points to research that showed three-quarters (75%) of existing customers on subscription-based streaming platforms added additional packages and connected devices during lockdown. Another industry that has been consolidating its position is video gaming and e-sports with viewership figures for online competitions expected to grow from 454m last year to 646m in 2023.
Meanwhile, online education companies, which have already benefitted from developments in video communication technology in recent years, experienced an immediate tailwind from the pandemic as an estimated 91% of all students worldwide were affected by school shutdowns. Direxion highlights the global online education market is expected to reach approximately $133bn by 2023, indicating a compound annual growth rate (CAGR) of 28.5% over the prior five years.
Similarly, demand for remote healthcare has soared as patients seek to maintain social distancing. Roughly two-thirds of patients surveyed indicated they currently prefer telemedicine consultations compared with just one-quarter who considered it a viable option prior to Covid-19. Consequently, telemedicine revenues are expected to balloon by 64.3% in 2020, while the sector is predicted to have a CAGR of 38.2% over the next five years.
Finally, social media companies have reported that roughly 47% of existing users increased their social media presence during the US lockdown, compared to just 16% which used the platforms less. Increasing social media engagement is a boon for the sector’s advertising revenue potential.