What’s the next big ETF theme?

Horizons ETF has always been a company that likes to take calculated risks and push boundaries. Since he took on the role of president and co-CEO in 2015, Steve Hawkins has been a driving force behind the company’s innovative strategies. He sat down with WPC to discuss where the ETF industry is headed.

WPC: At Horizons ETFs, you’ve become internationally renowned for your Marijuana Life Sciences Index ETF (HMMJ). What do investors need to know about that sector right now?
Steve Hawkins: Given that legalization is only a few months away, we’re really interested in what happens in the space after October 17 and what that will mean for investors. For instance, we’ve seen a flurry of consolidation recently, and we think that will continue in a bigger way.

We expect to see big tobacco, big pharmaceuticals and big alcohol all vying for a piece of the action. When you have these companies sitting on the sidelines, watching emerging cannabis companies eat their lunch, so to speak, they’ll have to react. At this stage, it would be difficult for them to achieve market share through an organic building process, so they’ll likely do it by acquisition. That will likely drive equity markets for the cannabis sector as well.

With the situation still dynamic, there’s inherent risk in picking the winners in the space prematurely. That’s why I think ETFs are the answer for investors looking to get exposure to marijuana – you can experience sector growth without having the risk of losing everything on a single company.

Right now, we’re working on a new product we’re very excited about: leveraged marijuana ETFs, another Canadian first. Oil, gas and gold stocks are traditionally the most actively traded ETFs we provide to investors. Marijuana stocks fall under the same trading philosophy, providing sufficient volatility to make it interesting for day-trading speculators.

WPC: What other big investing themes do you see Canadian investors embracing right now?
SH: Canadian investors are embracing the investment potential that Industry 4.0 has brought – the industrial evolution that’s occurring as the digital world merges with the physical. Emerging, disruptive technologies like robotics, automation and artificial intelligence [AI] are evolving rapidly, and Canadians want a way to invest in that change. We believe we’re creating products that will capitalize on the growth of those industries.

For instance, we offer the Horizons Robotics and Automation Index ETF (RBOT). It provides exposure to the performance of equity securities of companies that are involved in the development of robotics and/or AI. This burgeoning industry is rapidly approaching $100 billion in annual sales globally.

It’s not an easy space for investors to access on their own. Many of these companies have little overlap with major stock market indices, given that these are relatively new industries with companies spread throughout the world. But the technologies that are critical for our advancement are thankfully very investable. Now we can all participate through ETFs.

WPC: Your firm actually launched the first AI-driven ETF in Canada – the Horizons AI Global Equity ETF (MIND). What was behind your decision to allow an AI system to actively run an ETF portfolio?
SH: Imagine a portfolio manager who doesn’t tire, can digest millions of data points instantaneously and is immune to cognitive biases, performance anxieties and isn’t letting their bonus compensation affect their decisionmaking. That’s Alpha-10, our AI system that manages MIND.

Alpha-10 is a deep neural network learning system – meaning it’s more than just a calculator. It’s digital intelligence that gets smarter and better over time as it observes and learns from its own choices. With MIND’s global equity mandate, Alpha-10 is 24/7, consuming data from across the world and deciding asset allocations and regional exposures.

Increasingly, we’re seeing AI being used to manage complex, data-driven processes across industries. While we were among the first to apply AI to an ETF’s portfolio management, I don’t expect we’ll be the last. The potential of AI to revolutionize the way we invest and manage our money is one of the biggest disruptions coming in the world of finance.

WPC: Another area of potential disruption we hear a lot about these days is blockchain. Your firm has a new blockchain ETF, but you’ve taken a different approach than other providers. Can you explain?
SH: Like AI, the blockchain is another technology that has the potential to significantly transform the way we do business. However, not everyone understands it. For those who don’t, the blockchain is fundamentally a hardcoded digital ledger that can be used to record transactions or data interactions. It’s not just for cryptocurrencies – virtually any process can be improved with blockchain technology. That can include trade processing and settlement, smart contracts, medical records, and so much more.

With our blockchain ETF, the Horizons Blockchain Technology & Hardware Index ETF (BKCH), we’re providing a way to invest in the blockchain with pure-play exposure, but without the risks of buying unknown, earlystage technology companies. Ultimately, it’s the infrastructure behind the use of blockchain technology that we believe is the best-case prospect for growth.

Looking back at the early days of the internet, you never knew who was going to survive. Yes, winners eventually emerged, like Google, Yahoo and eBay, but if you invested in the Ciscos and other services that provided the infrastructure for the internet and its use, you would have made big money. It was Apple and Microsoft that did well because people using the internet needed computers.

We don’t know what blockchain technology variant will stand the test of time, but we do know that those building the tools that make it possible will continue to have a role to play in the future.

WPC: What are some other innovative products you’re planning to launch?
SH: One of Horizons ETFs’ guiding principles is accessibility. We empower investors with access to the information and tools they need to make investing decisions, whether they’re based on data or core beliefs. That’s why we’re in the process of developing our first socially responsible investing [SRI] ETF.

Right now, the demand for SRI products in the Canadian marketplace has been primarily from institutional investors. That’s largely because public pension funds have mandates to invest with environmental, social and governance tenets as part of their portfolio strategies. But individual investor assets directed toward responsible investing are growing – doubling, according to the Responsible Investment Association. We think it’s important to lead the way and bring ETFs to market that correlate with investors’ principles. We want to give investors access to investments they believe in and want to support, not just in terms of a return on investment. We’re aiming to launch at least one SRI ETF before 2019, so stay tuned.

Another ETF we’re excited about is one we just launched: the Horizons Active Emerging Markets Bond ETF (HEMB). It’s another firstin- Canada product for us – a title we’re always proud to achieve because it means we’ve given Canadian investors access to opportunities they otherwise wouldn’t have.

Emerging market bonds are an underserviced sector, particularly from an active management standpoint. From a fixed-income perspective, there is a lot of institutional investing in this sector and a lot of potential retail growth. The emerging market fixedincome network, both from a government and corporate perspective, pays higher yields, which goes along with the slightly higher credit risk to investors. However, with an increase in risk and lower duration, you can get access to higher yields, which we believe is generally a good investment decision. HEMB gives investors a way to participate in global growth through budding economies.