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Zombies, in Your Index

Posted by Toroso Investments on Apr 15, 2020 9:57:10 AM

Late last week, a CNBC interview with Chamath Palihapitiya, CEO of Social Capital, went viral due to his statement that “zombie” companies should be allowed to go bankrupt.  His argument was that the companies are owned by “hedge funds in the Hamptons,” - not Main street. 

The politics of this opinion are not of particular interest. However, the investment implications of the proliferation and acceptance of these views on index investors and ETF Think Tank advisors is imperative to research.

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Identifying the Walkers

Assuming the government allowed “zombie” industries to fail, how would investors identify and avoid these exposures? In reality, the list is quite subjective, but also intuitive.  Using Morningstar data, we identified 25 industries which we believe have been mortally wounded by the changes in work and consumption caused by the virus.

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Small and Mid-Cap are Infected

For advisors using broad based market cap weighted ETFs, this information is paramount.  Simple decisions on whether to own more mid-cap than large cap companies can be thought of very differently when you calculate the exposure to “zombies.”  The chart below shows that mid-caps have almost three times the exposure to “zombie” companies than large cap.

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Symptom or the Cure?

The implications for index investing go beyond just picking the right capitalization to avoid as many “zombies” as possible. Should investors even accept 5.25% walking dead tickers in their large cap exposure?  Could this crisis offer an opportunity for a resurgence in active or thematic investing?

In last week’s “Get Tanked Thursday” Zoom happy hour, organized by our ETF Think Tank contributors, the question was asked if these “work from home” trends were in response to the virus, or if they were already happening, and simply accelerated by the crisis.

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We have covered a number of mega trends over past ETF Think Tank Research notes that we believe to have little or no exposure to “zombie” industries.  We have calculated the exposure in all equity ETFs and are happy to share with advisors who are interested. 

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TETF chart

Returns as of April 9, 2020.
Inception Date: April 4, 2017.

Index performance is for informational purposes only and does not represent any ETF. Indexes are unmanaged and one cannot invest directly in an index. Past performance is NOT indicative of future results, which can vary.  

 

TETF.Index Performance vs. Leading Financial Indexes

Click here for information on the Index following the ETF industry

 

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