Kevin O’Leary On How His E-Commerce And Internet ETF Is Thriving In A Volatile Market
Dylan Wittenberg , Benzinga Staff Writer
June 21, 2019 7:21am
Volatility is taking over the markets as trade war discussions between the United States and China heat up. Across the board, nearly all sectors are seeing a fallback, and this rings especially true within technology and e-commerce.
Despite current trends, tech and e-commerce ETFs have remained comparatively resilient to the overall market, and perhaps the most resilient of these ETFs is the O’Shares Global Investment Giants OGIG is one of O’Shares four ETFs, sitting alongside OUSA, OUSM and OEUR.
OGIG, which is the company’s specific internet technology and e-commerce ETF, is up around 29% year to date and has beaten the markets in the wake of the trade war. Its primary design centers around a quality growth approach that evaluates and ranks e-commerce and internet companies based on revenue growth, profitability and strength of their balance sheet.
Benzinga spoke to O’Shares CEO Connor O’Brien to learn more about the secret to OGIG’s success, as well as future expectations for how the internet technology and e-commerce sectors will fare as trade tensions progress.
OGIG is a quality-growth ETF made up of some of the largest internet technology and e-commerce companies in the world. Its fundamental structure focuses on quality and revenue growth.
“The quality approach basically means measuring the fundamental metrics of companies such as revenue growth, profitability, and debt levels, scoring them all, ranking them all, and excluding the ones that have bad measures,” according to O’Brien.
The fund’s 10 most substantial holdings include Amazon, Facebook, Alphabet, Alibaba, Netflix and Microsoft.
Behind the scenes, there exists a meticulous process in selecting stocks for the OGIG ETF Index. O’Brien explained how his team utilizes these following steps when deciding to add a new e-commerce or internet company to the fund:
- Companies are selected from 2,500 global stocks within specific sub-industries and derive over 50% of their revenues from internet technology and e-commerce.
- The stock must pass the quality test: it must have positive gross margin and enough to cash to support cash burn for at least 12 months.
- The stock then gets scored and ranked based on revenue growth.
- If the stock ranks above a certain minimum position size limit, then it’s added to the portfolio and the weighting in the portfolio is determined in part by it’s score/rank and market cap.
Kevin O’Leary On The ETF
Kevin O’Leary, O’Shares co-founder and chairman, explained that e-commerce and internet stocks have high growth potential in the marketplace.
“The growth investments most interesting to me are e-commerce and Internet companies that have what it takes to keep growing,” he said. “Large e-commerce and Internet companies, with strong balance sheets, growing the top line and earnings are the stocks I want to own. OGIG does it all for me in one ETF, owning 60+ e-commerce and Internet stocks.”
How OGIG Differentiates Itself
OGIG Doesn’t Get Caught Up By the Big Names
OGIG differentiates itself from typical tech ETFs in a few distinct ways. Firstly, the fund may avoid big name brands that no longer have the high rolling numbers.
When comparing OGIG to other significant indexes like the NASDAQ 100, O’Brien explained how OGIG does not create confusion in the markets by holding companies that aren’t pure internet technology and e-commerce. Specifically, he mentioned how some Nasdaq 100 tracking funds carry brands like Kraft Heinz, which are incompatible with their fund’s sector.
“People may not actually understand what they’re buying,” said O’Brien. “When they buy a pure tech-sector fund from the grand-daddies of the sector-fund business, they don’t realize that there’s a whole bunch of large low growth technology companies.”
OGIG Goes Global
The ETF has a large percentage of holdings outside of the U.S. Specifically, about 70% of the ETF is U.S. securities, 20% is Asia-focused securities and 10% is other global securities.
O’Brien believes having around 30% of OGIG’s holdings outside of the U.S. will allow it to own many great e-commerce stocks that are in other markets.
The One Year Quality Measure
OGIG has implemented a one-year quality measure into its stock picking system to avoid dangerous companies that are burning too much cash to maintain their survival.
O’Brien referred back to some of the lessons learned during the dot-com bubble burst in the early 2000s as a reason to meticulously find profitable companies.
“Twenty years ago, people were valuing companies based on eyeballs and clicks on the site and those crazy things…But there are still companies that are burning massive amounts of cash, more than they might be able to finance going forward,” O’Brien explained.
“If you look at our ETF, the O’Shares Global Internet Giants ETF (OGIG), we actually have a quality measure: the company has to have enough cash on the balance sheet to cover any burn rate for at least one year because we don’t want to invest in poor quality companies that are burning too much cash to maintain their survival.”
O’Shares also discovered and implemented a stock performance indicator into their OGIG stock-picking methods based on pure revenue growth. Meaning: “when you evaluate companies for forward revenue growth, we have found that it can be a good predictor of future stock performance because it looks at the business performance of the company.”
Opinion on the Trade War
Despite the extreme volatility caused by trade war talks over the past few months, O’Brien believes concerns are exaggerated. From a macroeconomic level, he noted how U.S. exports to China make up a significantly smaller ratio of total U.S. GDP when compared to China imports as a percent of China GDP.
“I don’t think you should be so scared about the trade war,” he said. “Some individual stocks are going to get killed if the trade war goes the wrong way. But the U.S. economy has less than 0.6% of its total GDP coming from exports to China. So the U.S. economy is going to get through this relatively well and will likely come out better off on a multi-year basis.”
Further, O’Brien noted how the ability of the U.S. to export their commodities elsewhere puts them in a much more stable position than China. He also mentioned how companies that receive supplies from China, such as Nike, can move their factories to other places around the world in the event of high tariffs on Chinese exports.
O’Brien also believes there is a demand for U.S. exports outside of China, but there is less worldwide demand for Chinese exports.
The biggest U.S. exports to China include commodities and Boeing planes; if China continues to pressure the U.S., O’Brien believes the U.S. can start sending the commodities elsewhere and China needs the planes.
“The U.S. has a lot less to lose, and China has massively more to lose if we’re looking at dollars to dollars,” O’Brien said.
Recommendation For People Considering ETFs
O’Brien believes that, in general, people should start considering long-term investing more. He used an eye-opening number to explain his point.
“There’s a phenomenal stat. Look at someone who started investing when they were 20 and is now 65. If that person were an average American and had invested 10% of every paycheck in stocks, they’d now have over $1 million,” he said.
In particular, O’Brien recommends the average investor buy a set of five to 10 ETFs with securities that they are passionate about. By doing this, he believes people will have the opportunity to grow their savings while continuing to earn money through work.
He emphasized the importance of finding ETFs with stock selection processes that are diligent and sensible.
As ETFs become more common among the average investor, they will likely become more specialized in their relation to the market. OGIG, and the rest of the O’Shares arsenal of ETFs are already leading the way on this path of innovation.
For current standard performance of the Fund, please visit OGIG Fund Page.
OGIG Fund Page | OGIG Holdings
|Name (As of 01/28/2020)||Country||Sector||Fund Weight|
|Facebook Inc||US||Communication Services||5.76%|
|Alphabet Inc||US||Communication Services||5.74%|
|Amazon.com Inc||US||Consumer Discretionary||5.62%|
|Alibaba Group Holding Ltd||CN||Consumer Discretionary||5.48%|
|Microsoft Corp||US||Information Technology||4.56%|
|Tencent Holdings Ltd||CN||Communication Services||4.45%|
|Netflix Inc||US||Communication Services||2.27%|
|salesforce.com Inc||US||Information Technology||2.25%|
|Shopify Inc||CA||Information Technology||2.04%|
|Delivery Hero SE||DE||Consumer Discretionary||1.80%|
|MercadoLibre Inc||AR||Consumer Discretionary||1.79%|
|Snap Inc||US||Communication Services||1.77%|
|Adobe Inc||US||Information Technology||1.75%|
|ServiceNow Inc||US||Information Technology||1.75%|
|Meituan Dianping||CN||Consumer Discretionary||1.70%|
|Zoom Video Communications Inc||US||Information Technology||1.64%|
|Twilio Inc||US||Information Technology||1.63%|
|Bilibili Inc||CN||Communication Services||1.62%|
|Pinterest Inc||US||Communication Services||1.57%|
|Atlassian Corp PLC||GB||Information Technology||1.55%|
|Zscaler Inc||US||Information Technology||1.50%|
|MongoDB Inc||US||Information Technology||1.45%|
|Zillow Group Inc||US||Communication Services||1.42%|
|Smartsheet Inc||US||Information Technology||1.39%|
|Coupa Software Inc||US||Information Technology||1.36%|
|Tencent Music Entertainment Gr||CN||Communication Services||1.32%|
|Okta Inc||US||Information Technology||1.28%|
|Trade Desk Inc/The||US||Information Technology||1.27%|
|Elastic NV||US||Information Technology||1.27%|
|Zendesk Inc||US||Information Technology||1.25%|
|Anaplan Inc||US||Information Technology||1.23%|
|Wayfair Inc||US||Consumer Discretionary||1.23%|
|Takeaway.com NV||NL||Consumer Discretionary||1.22%|
|Grubhub Inc||US||Consumer Discretionary||1.22%|
|Workday Inc||US||Information Technology||1.10%|
|RingCentral Inc||US||Information Technology||1.09%|
|Xero Ltd||NZ||Information Technology||1.09%|
|DocuSign Inc||US||Information Technology||1.08%|
|Avalara Inc||US||Information Technology||1.04%|
|Wix.com Ltd||IL||Information Technology||1.04%|
|HubSpot Inc||US||Information Technology||1.04%|
|Etsy Inc||US||Consumer Discretionary||1.00%|
|JOYY Inc||CN||Communication Services||0.99%|
|Zynga Inc||US||Communication Services||0.95%|
|Splunk Inc||US||Information Technology||0.93%|
|Spotify Technology SA||SE||Communication Services||0.92%|
|Just Eat PLC||GB||Consumer Discretionary||0.83%|
|Match Group Inc||US||Communication Services||0.82%|
|JD.com Inc||CN||Consumer Discretionary||0.80%|
|Palo Alto Networks Inc||US||Information Technology||0.79%|
|Proofpoint Inc||US||Information Technology||0.75%|
|Trip.com Group Ltd||CN||Consumer Discretionary||0.65%|
|Twitter Inc||US||Communication Services||0.62%|
|Zalando SE||DE||Consumer Discretionary||0.61%|
|Intuit Inc||US||Information Technology||0.54%|
|Fortinet Inc||US||Information Technology||0.51%|
|Temenos AG||CH||Information Technology||0.50%|
|Autohome Inc||CN||Communication Services||0.48%|
|Momo Inc||CN||Communication Services||0.47%|
|NetEase Inc||CN||Communication Services||0.46%|
|Rakuten Inc||JP||Consumer Discretionary||0.43%|
|Booking Holdings Inc||US||Consumer Discretionary||0.42%|
|VMware Inc||US||Information Technology||0.42%|
|Baidu Inc||CN||Communication Services||0.36%|
|Z Holdings Corp||JP||Communication Services||0.31%|
|Expedia Group Inc||US||Consumer Discretionary||0.29%|
|VeriSign Inc||US||Information Technology||0.25%|
|Electronic Arts Inc||US||Communication Services||0.23%|
|eBay Inc||US||Consumer Discretionary||0.20%|
|Activision Blizzard Inc||US||Communication Services||0.16%|
|HONG KONG DOLLAR||Cash||0.00%|
|SOUTH KOREA WON||Cash||0.00%|
|NEW ZEALAND DOLLAR||Cash||0.00%|
Before you invest in O’Shares ETF Investments Funds, please refer to the prospectus for important information about the investment objectives, risks, charges and expenses. To obtain a prospectus containing this and other important information, please view or download a prospectus. Read the prospectus carefully before you invest. There are risks involved with investing including the possible loss of principal.
Concentration in a particular industry or sector will subject the Funds to loss due to adverse occurrences that may affect that industry or sector. The Funds may use derivatives which may involve risks different from, or greater than, those associated with more traditional investments. A Fund's emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform the market. Also, a company may reduce or eliminate its dividend after the Fund's purchase of such a company's securities. Returns on investments in foreign securities could be more volatile than, or trail the returns on, investments in U.S. securities. Exposures to foreign securities entail special risks, including political, diplomatic, economic, foreign market and trading risks. In addition, a Fund's investments in securities denominated in other currencies could decline due to changes in local currency relative to the value of the U.S. dollar, which may affect the Fund's returns. See the prospectus for specific risks regarding the Funds.
The securities of small capitalization companies are often more volatile and less liquid than the stocks of larger companies and may be more affected than other types of securities during market downturns. Compared to larger companies, small capitalization companies may have a shorter history of operations, and may have limited product lines, markets or financial resources.
Companies involved with Internet technology and e-commerce are exposed to risks associated with rapid advances in technology, obsolescence of current products and services, the finite life of patents and the constant threat of global competition and substitutes.
Past performance does not guarantee future results. Shares are bought and sold at market price (not NAV), are not individually redeemable, and owners of Shares may acquire those Shares from the Funds and tender those shares for redemption to the Funds in Creation Unit aggregations only, consisting of 50,000 Shares. Brokerage commissions will reduce returns. The market price of Shares can be at, below, or above NAV. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 PM Eastern time (when NAV is normally determined), and do not represent the returns you would receive if you traded Shares at other times.
O’Shares ETF Investments Funds are distributed by Foreside Fund Services, LLC. Foreside Fund Services, LLC is not affiliated with O’Shares ETF Investments or any of its affiliates.