3 Sectors You Might Have Missed with Upside (Episode 12)

Yeah, so what's nice to know is that we're really entering into a new phase of industrial revolution. So before, you know, we were in the computing revolution where everyone had a desktop and everybody used email, and now we're really moving into the next segment, which is the intelligence revolution. And so it's the industrial revolution number four, and that's where every device is connected to the internet. And, and it's what data and information is generated in the world all around us. But fundamentally as humans, we're pretty, you know, predictable in that sense, right? Like every day we need food every day we need, you know, shelter every day we need healthcare. So, you know, when we're thinking about sectors, we, we always like to make it, you know, as pertinent to our lives, as much as possible, despite all the disruption that's happening and innovation that's happening all around us. So, so we like to focus on the disruption and innovation that is happening in our daily life and how it's going to play out for the rest of our lives. So we try to make it as rudimentary and as simple as possible.

Great. Absolutely. So I think we should start out with the sort of genomic and biotech strategy that we have, and it's called the CRISPR and gene editing sector. And, you know, it's really, really focused on what we believe is the next generation of healthcare. So I always like to take a step back and use an analogy where we had in 2007, Steve jobs came out with this iPhone in January of 2007. And before that, you know, we already had, you know, Palm pilots, we had black bears, we already had these smart devices, but what he did is he actually revolutionized how we used it. And so if we take a step back and think about our healthcare, where we are at today is we can actually map as well as edit our own DNA. And that is revolutionary. That's gonna be healthcare 2.0. And so we wanted to figure out the best way, how do we play that?

And that's why we came out with the XD ETF, where, which is a core concentrated position that just focuses on, on the companies that do CRISPR and gene editing. Because over the last 10 years, it was sort of that Palm pilot, you know, Blackberry moment where we had the last 10 years of really building up sort of this ecosystem and what's going on behind it, where the next 10 years are going to be revolutionary and change our daily lives. And that's where we are today within CRISPR and gene editing and what CRISPR and gene editing is really simply is it's a pair of biological scissors that goes into your DNA, cuts it, edits it, and puts in a new piece of DNA. So what it does is treats rare diseases. And so it cuts out that bad DNA and puts in new DNA. So when we're talking about healthcare 2.0, this is really fixing your DNA, right?

This is fixing healthcare as opposed to taking, you know, drugs and therapeutics repeatedly over, you know, six months, a year, three years, or constantly being on the same drug. This is a one time systematic treatment and that's it. So it's just one time and one time only, and then you're done. And so that is game changing. And as we start to learn more data and information around our DNA, this is going to prove more pervasive in our daily lives, where we're going to be mapping our genome. We're gonna be treating our genome and DNA. And so that's why we're really focused on these companies. And this new technology is really what it is. And so we're at the start of this. So it's, we call it the S-curve of growth, right? Where we're really in the beginning and infancy of this.

Yeah, so it is in its infancy and beginning. So I've been following it for a while. And Walter Isaacson came out with a, a book about Jennifer downer who really discovered how we can really apply CRISPR, which was 10 years ago, actually this year. And so I've been following the space and we've been doing it out of body where we've been taking out the cells and then editing them in a lab, but what changed and where I was just completely excited by the potential of what this new technology can do is what happened last year in June, where we actually saw the first successful application of CRISPR within the body, it's called in vivo, where they actually just applied the technology within your own body and it worked. And so we saw, you know, this huge commercialization success and application within the human body, and that changed everything.

So now that we can do it outside of the body, inside of the body, it just led to green fell field space. And really, you know, even talking about it, sending chills down my body, because you hear the people that are in these studies and how it just changed. The quality of their lives is unbelievable. I mean, you have people where they were having ocular problems and they couldn't really see, and it was, and now they're seeing light and they're seeing colors and shapes and they're out on dance floors now. And so, I mean, they still can't see perfectly, but I mean, you just read about what these treatments have done and, you know, that's really where I led and, and went full flung into where last summer, where you had in Telia and Regeneron come out with that study and showing that you can do it in, in person in the body. And that changed everything for

Yeah. And this goes back to that study. And so one of the stocks is Intel. And so Intel focuses on CRISPR and what's really nice is that they actually have a lot of catalysts that are coming up this year. So if we take a step back and say, okay, when I'm investing in biotechnology stocks, or next generation healthcare stocks, what is really going to drive those stocks higher because they really trade on an idiosyncratic risk, right? It's sort of binary either the drug's gonna work or it's not. So it's, it's a one or a zero situation that you see happen a lot of times within healthcare. And so what we really like about in Telia is that they have a great partner in Regeneron, which has, you know, deep clinical experience knows how to commercialize these drugs is very picky with partners, unbelievable medical team that helps deliver their drugs to commercial success.

So they've got all the ways to manufacture these drugs and therapeutics. And so they've partnered with Regeneron and that really is a validation of Intel's CRISPR platform. And so with the success they had last year in one of their first applications that was super successful, they also have catalyst coming up over the next quarter on a drug. They have called Intel 2001. They also have several other ones that are in the pipeline. So over the next, even 3, 6, 12 months, you're going to see a lot of data come out about their drugs and the commercialization that can happen from those drugs and the successes and data's points that have come from those drugs. So we're really excited by that because they're also, uh, really well balanced, you know, when it comes to their financial statements. So if you look, they have a lot of cash on their balance sheet. So they have a long leeway to develop more drugs. Now that they've proven the success of their initial, you know, drug from last June. So that really sent the market on fire, the stock, I think doubled. And you know, it's been a tough time in the market right now, but it's come back to the point where, where now you've got an entry point along the same price.

Yeah. It made a tremendous move. And so, you know, if you're investing now in Intel, you're getting in at the same price point, but you've already had the success behind it. So the interesting aspect too, is that Intel is not only focused on CRISPR. They're also focused on gene editing and they're moving into different types of editing. So it's pretty interesting when you look at how, not only are they focused on the drugs that they have in the pipeline, but they're looking at the new generation of gene editing and they're starting to invest in that. And so you've got a top tier management team that's executed and has delivered on already some applications of their technology and are looking to further build that out. And so this goes back to, you know, this is nascent technology, we're talking, you know, they're gonna need to get through FDA studies and they're gonna need to get approvals. And so that's why this type of investment is a three year at a minimum type of investment, right? You need to think 5, 10, 15 years when you're investing in companies that are trying to capture the S curve of growth like Intel, you need to have a long term horizon. This is sort of a publicly traded venture capital investment is the way to think about it.

Yeah. Because it actually trades idiosyncratic from the market. And what I mean by that is, is you have its own catalyst, which will drive the stock price higher. So if you go back to last year, what drove the stock price to double it was the success in their trial. And so you're going to need more of that, right? So the market, it is subject to the market's whims, but if you're investing, you have to think of it, you know, sort of like what movie producers do, right? They come out with 10 different movies and they're hoping that three of them will be blockbusters and cover the rest of the movies that they, and they don't know which one's gonna be a success or not. That's why they, you know, fund 10 of them. And so that's why I really look at this and figured it was a great way to put it into an ETF because you're diversified amongst these companies like an Intel, like a Regeneron, which is also in the strategy because 70% of the strategy we have is focused on these technology companies, the CRISPR and gene editing. But another 15% is their development partners like a Regeneron. So you'll see Regeneron in the portfolio because they have that clinical expertise to bring it to market. And then the other 15% is the next generation sequencing companies that help them map out our own DNA. So it's a broad diversification within this small niche sector. And so, you know, we think your time horizon in this and is gotta be 5, 10, 15 years, because it's gonna take that long to commercialize these drugs.

Yeah. And so the way to think about this strategy is that it's going from a pandemic to an pandemic trade, right? So before we were completely impacted that we, you know, couldn't go out, we had a social distance we had to mask up and what you're starting to see now, and in the earnings reports is that as humans, we're wanting to go out and travel and have experiences. So if we just look at, like I said, our daily lives, okay, the front page of the wall street journal today, I still get the physical paper, says Americans start S splurging on travel and experiences, right? So, you know, here it is on the front page. So every day Americans are going out and they're wanting to get those experiences. And so if we take a look at what the hotel and lodging ETF encompasses, it's really focused on the aspect of the travel and tourism industry.

That is the key cog in it, right? If we think about what hotels are, they're an integral part of that. And so they're part infrastructure, they're part business, they're part consumer, and they're part necessity. And so, you know, when we, we look at the reopening trade, hotels are pretty interesting because they're a great barometer of the economy because you get daily rates and it focuses on the consumer as well as businesses. So businesses are set to spend a lot more money over the next 1, 3, 5 years as we start to reopen. And so this is a great way to play that because businesses need to start conducting more business and they're gonna be done in person, whether they have their own company, offsite meetings, whether it's, there's gonna be conventions, whatever it is going on, businesses are going to have to reinvest in themselves. How do they do that?

Part of it is through, you know, travel and tourism, because you have salespeople traveling all across the country, or you have events going on. And so this is a very, very big part of the reopening trade, which we think is differentiated than the other ones. Because if you look at people have been playing airlines, they have their own idiosyncratic risk because they're heavily regulated. There's only a few of them. They're subject to weather. It's really tough to use that as a reopening trade on top of cruise lines, focus on a narrow segment, so of a consumer, right? You don't get a lot of business spending. So what we like about hotels is that it captures business and consumer. It's a great barometer of the economy, and there's been so much pen up demand that hotels are the key necessary infrastructure. In that regard

There's nothing like revenge, right?

Yeah. And it goes back to there's nothing like that, especially when you're having a convention or there's an event where people can go and work with colleagues and have ideas come out of conversations that are in person. And it's unbelievable because you're starting to see that a lot more consumers want to get back to that where the it's, the productivity is unbelievable. You can have off the cuff meetings, you can bump into somebody, you can, I mean, you can't have that via zoom. So if I'm at a convention and somebody comes to my booth or have you, you start having a new connection, a new dialogue, a new frame of, uh, business that wasn't there before. And so that is really what's going on. And, and the important thing about the hotel and lodging space is we go back to disruption. There is disruption abound in it.

And one of the interesting things is, is we look at the earning season exceptionally well. We look at Marriott was up 5% Hilton was up Airbnb. And so you look at all these companies and why are they up? And it's because of the disruption that has happened within the travel and tourism space, where there has been very little new builds when it's come to hotels. And so you need to actually follow the money. You're starting to see a lot of private equity money come in and start buying up hotels, including extended stays. And so they're investing and buying those companies because there's very limited supply, but exceptional demand, you know, we talk about revenge travel and things like that. There is so much demand out there, but supply has been lacking through the pandemic. Not only because you couldn't get workers to build the hotels, but they didn't want to reinvest in it because the occupancy rates were still lower than the pre pandemic levels. So you've got this like perfect storm within the hotel and lodging space where there's limited supply, but exceptional demand. And that leads to a great investment thesis.

Yeah. And so Marriott is one of them on a traditional side, but let me take a step back and talk about a different innovation that has happened within the space. That's relatively new and that's Airbnb. And so that's a lodging platform service that really has unlocked asset value. Not only for people, but companies as well to generate more additional income or, you know, excess inventory that would've been stagnant. So just, you know, the super bowl recently happened. What is a great lodging platform service if every single hotel's booked up by every major corporation, right? Airbnb, so people can go and unlock, you know, the value around the area where the events are happening and book, you know, uh, somebody else's home or book, you know, there's companies that just run Airbnbs. And so the interesting thing is that what Airbnb has done, unlike some of the other companies that have led to disruption in this space is Airbnb has solely focused on lodging platform services.

Unlike some of the other companies out there that let's take an Uber, for example, it's like, we're gonna have delivery drivers, and then we're gonna do eats, and we're gonna do this, and we're gonna do that. And they're, they're just not sticking to their niche or their focus where Airbnb has. And Airbnb was up 5% on their earnings recently. And it's because they said a monumental shift is taking place in the way people travel. And it's now commonplace for people to work from home. And the monumental shift is people are untethered to a physical location. So now they're starting to work for a lot longer in, by traveling to thousands of different cities. And so they specifically said that Airbnb said that remote work has untethered many people from the need to be in the office. As a result, people are spreading out to thousands of towns and cities saying for weeks, months, or even entire seasons at a time. And so, you know, Airbnb has unlocked that monumental shift and that's actually led to longer term stays of 28 nights or more is their fastest growing category where used to be super small. I mean, booking for 28 days, that's a very long time and think about the cash outlay. Well, now it accounts for 22% of their gross margin. So it's unbelievable. And that's a tectonic shift in our daily life that's happening.

Of course, you can totally make a deal. And I talked to actually a lawyer the other day about this strategy and he's like, oh my gosh, Airbnb is great service. He's like during the pandemic, I was down in Brazil for six months and I was learning Portuguese and on the beach and it just kind of blew my mind that it was just like, okay, just, you know, the pandemic hit, I'm gonna go to the beach and learn Portuguese and still do my job. , it's fascinating.

Yeah. It's, it's been a great thing for the last several years, but it's going to be what we believe is gonna be a great opportunity over the next several years as well, like 5, 10, 15 years. We think there's a long term investment horizon in the residential investing community, because two aspects, all you need to know is these two things, if you're gonna invest in real estate demand and demographics. And so there is a significant pen up demand due to underbuilding that has happened from the last recession, right? The great recession that happened in oh 8 0 9. So you had a decade of underbuilding that happened. So that's just on the underinvesting side, right. Then you've got the demand and demographic side where here it is, we've got this giant new generation coming in. That's it's thematic demand where you've got millennials, not only having this interesting transition to first time home buyers, because what they do is they go into apartments and, you know, they graduate college, they move into apartments with a couple of their friends, and then there's this new transition where they go into single family rentals as they start to get married, start to have kids.

And so what they do is they actually rent homes, and this is a big part of the market that's really growing. And I'll be talking about one of these stocks, but they're doing that. And then going out and trying to buy their own home after they save up enough for a deposit, you know, the 20% down, or they feel comfortable that they're cemented and they're planted that they're not going to move because what we've seen in the residential market as well, is that typically a first time home buyer would be in their house for about six years because of this new industrial revolution we're going into people are moving a lot more and especially because of the pandemic. So they're going to new cities or they're taking new opportunities. And so you've got this really demographic shift where people are wanting to rent homes or, you know, high class, a property, uh, apartments for longer now till they can become settled.

So that's really what's happening is the demand in demographics. And the last key point to take away from this is that there are 43 million households households in the United States that rent. And so this is a great strategy because these are specialized management teams that focus on their niche because our strategy focuses on the four main sub sectors of residential real estate, single family rentals, as I mentioned, apartments. And then you also have student housing as well as manufactured housing. And so all of those areas have done exceptionally well over the last couple years, but we think there's an exciting opportunity over the next, you know, five, 10 years.

I'm glad you brought up Lenar because one of the things that has happened in one of our key sectors is the single family rental market. And the key player that we have, we have a couple key players in there, but the one I want to talk about is invitation homes. And what's pretty interesting is that Lenar recently announced that they're gonna be spinning off their single family rental platform. So they, as a home builder, they actually had that. And now they're gonna spin it off into its own entity. It should be tax free, but that validates how important the single family rental market is. And if we look at companies that are our portfolio, they own less than 1% of the single family rental market inventory. That's out there yet. They have some of the best platforms because what they do is they leverage technology and regions to really build out their area.

So if you're running a home, you can rely on invitation homes to come out and fix the property real quick. If you need it. You know, sometimes if you're renting a single family home from a mom and pop, the boiler goes out, or you or something happens, you need it to be fixed. You know, it could take days, they, oh, let me try to find a plumber. Let me try to find a maintenance guy. Well, these have dedicated staff and teams in those districts where they can go out and fix the properties like that. And they're also leveraging technology as well. So typically it was worried when invitation homes came public, that there was gonna be a lot of turnover and that would lead to a lot of costs to manage, run, and operate these properties. And then there would be downtime where families moved out.

And what have you, that actually hasn't been the case. You actually have the average lifespan of being two and a half to three years. So that's been really good for increasing margins. Now we also have rents are up 10% across the board, according to core logic over the past year, not only in single family rentals, but also apartments. And so we've got this tailwind of rents are going up and, but then housing's going up. So people are wanting to stay in their single family rentals longer because there's no inventory to buy homes in the area that they want. And their quality of life in these single family rentals is so high. I mean, these are great properties that have been well maintained and well operated.

I think the most important thing they should do is go to Kelly etfs.com and then select the ETF that they wanna learn more about. And right there on the ETF page, you can actually see the investment case and thesis right there laid out really short and simple. So what you could do is, is go to the Kelly etfs.com. Look at the ETF. You like read the investment case, and then look at the fact sheet, look at the holdings and really determine how it could fit and into your portfolio, whether it's a compliment to some of your current existing holdings, or it could be a core holding that you wanna hold over the long term, you know, and replace some of your current existing strategies. So we believe that, you know, if you go through and look at the investment cases, it'll really help you understand the driving aspects of those ETFs

It's been my pleasure. Thank you.