Spot Opportunities Even When Disaster Strikes (Episode 34)

You know, one thing was that this wasn't necessarily an industry that, uh, in ETF had been created around it yet. And you know, part of it is you're looking for opportunities where we can create something new and innovative to provide new exposures for investors. Um, another one is also looking at kind of the long-term capability of a theme. And when we look at something like natural disasters, these are something that have likely affected every single person on the planet. And so a thing like a hurricane, a wildfire, droughts, earthquakes, volcanoes, flooding, um, these are things that, you know, no matter where you live, you or someone that you know is likely either a survivor, a victim, or is potentially going to be affected by these in the future. And what really started to catch our attention as we started diving down into this theme more was looking at the increase over years of the intensity and predominantly the financial devastation that comes along with natural disasters.

And some of the costliest natural disasters have happened just in the last several years alone. And this is something that is global in nature, whether you're living on the coast in, uh, the east coast in the us, or you're living in the ring of fire out in the Pacific or you're living, you know, in the middle of the country, there are all types of natural disasters that can affect you. And what's really scary is that, um, fortunately the fatality rate for natural disasters has been going down, which we attribute to better warning, better preparation, better engineering, but you do have more people living in, uh, potentially high danger risk areas. And that's because people are buying second homes and third homes and we're seeing population centers increase. And so although the fatality level as a whole has come down slightly for natural disasters, the cost of the devastation has been increasing significantly.

And we're looking at roughly over 400 million a day around the world from these disasters, but the us, uh, the white house just came out over a month ago saying that they believe that by the end of this century, the cost of natural disasters to the us budget alone may be roughly 2 trillion per year. And that's almost five and a half billion a day that does not include what individuals or companies are going to need to spend to prepare for natural disasters or to recover from them. It doesn't include what other countries will be spending. And so we see this as these companies being an even greater demand than many people might realize. And because of this increasing financial devastation increasing need for these companies, helping with prevention, recovery, mitigation, and so on that this could be a really interesting industry segment or theme that many people might be looking for exposure to.

No, absolutely. It's, I've fortunately managed to live through hurricane Katrina. When I was down at school in new Orleans being a new Yorker, I saw a hurricane Sandy and we housed about 14 people in our, our New York city apartment for several days, while even we were without power. You know, I've seen the effects in devastation firsthand, and I understand the importance of, of having plans in preparation. And sometimes that could also be equated to financial plans and trying to prepare for different types of scenarios. So being able to provide new access and exposure to investors was what we were hoping to do. You know, this could be used for people for many different purposes, whether you're an individual that wants to invest in this longer term theme of what we're seeing with climate change occurring, whether you're, um, an insurance company that's potentially looking to position themselves for, you know, increased devastation for natural disasters, whether you're a hedge fund looking for things as a short term catalyst trade, there are many reasons that someone may look at a fund such as FEMA, and it was important to categorize these types of companies and that new exposure for investors.

Yeah. So this was something that took many years of development, many partners before it was finalized into this Bey index, which is actually the first ETF here in the us to license under the TFI brand and new index from them. So we were thrilled to do that, but this took, you know, many years of development before we felt comfortable with the composition and the strategy methodology behind, uh, in index. So, you know, first it was really important to identify you, what are these natural disasters, whether natural, whether manmade man accelerated, uh, meteorological, you know, there are so many, you know, kind of classifications, you know, what are these types of storms? You know, we're looking at earthquakes, hurricanes, floods, volcanoes, droughts, wildfires, you're out in the west. That's something that you're probably living through right now.

Exactly. And so, you know, you see it firsthand, there are things that, you know, companies do in order to help ahead of time to try to help, to mitigate, or make certain areas more resilient. You know, in California, you have hospitals that are being required to build up their capabilities, to withstand earthquake so that they can stay online. That's a multi-billion dollar project across the, the hospital system in California. I mean, small municipalities, large municipalities at the government level, there are major things that are happening. So, um, look, the index provider looked for companies that were also getting, uh, contracts from FEMA and related government agencies from around the world over the last five years. One of the first things that I always looked to and you're told at a hurricane is coming, is you go to a home Depot, you go to a Lowe's and you buy plywood to put up over your windows to protect the glass after the storm you're then going, and maybe you're buying paint or you're, you're buying equipment to redo your roof or other things that may have been destroyed.

So it was really looking at, you know, the types of disasters, the types of companies that help in, in preparation, mitigation, resilience, and recovery. And what you end up with are, you know, some, some home goods and home improvement places you end up with water related companies. So water treatment, water, transportation, waste management, waste, mitigation, dredging, construction, engineering consulting. You know, there's a large list of types of companies that come into play. And we actually have an overlap in one of the names with our Spacey T F UFO and that's Maxar and Maxar has satellites positioned around the world in an orbit that are helping us track weather patterns, track wildfires, uh, detect storms and their movements. And so, you know, uh, natural disaster, you know, takes many different players to help us be best protected and best recovered. And this is something that's providing a truly diverse global focus on these types of companies that come to our aid when we need them.

Both, you know, I think it's important if you're creating an, an ETF, you know, if it has a completely similar composition to another theme or industry already that might not provide much opportunity or reason for an investor to consider it when you're providing, uh, exposure to new companies where they can access companies and geographical locations that maybe are difficult to, you know, this is something that I think investors, you know, look for and seeing that the fund has very little overlap with any other funds out there. You know, it's not just another, you know, global infrastructure play, you know, there's many different companies that you would never find in those types of funds. And so, you know, those that are looking for unique exposure or differentiated exposure, this could be an interesting satellite position that they might like to add to their portfolio. And instead of Texas hedging themselves and, you know, putting them into another fund, that's giving them, you have the same exposure.

Yeah. You know, for every investor they're going to have their own uses and needs for portfolio construction. I think that this is, is providing for probably most people out there. New exposures are a new way of classifying and accumulating these types of companies. You know, whether you live in a high disaster area and you're seeing these companies come to your aid on a regular basis. And, and you realize that as a potential, you know, investment opportunity, you know, many people didn't know the company Generac until the Texas grid went down over a year ago. And now it's something that, you know, many houses in all different areas, whether you're a business or an individual, you know, are looking for types of services like that. And so I think, you know, one of the great things about the ETF industry is that you get to create products that sometimes people don't even know that they want.

And once they understand the investment thesis, they say, this makes a lot of sense. And they may use that for numerous reasons. They may try to use it as a hedge. They may try to use it as, you know, exposure to potentially a growing industry. Like the, the stats that we mentioned earlier. I mean, these are tremendous numbers. I mean, five and a half billion dollars a day. That's coming out of the us budget to go to this. You know, if someone really believes in climate change and thinks that these devastations are going to get worse, whether you're living in Miami and concerned about rising sea levels, you're living out west and you're concerned about droughts and you're a farmer and you're trying to figure out, you know, how you, we're going to need companies to aid us. We're not just going to give up on farming. These are really important companies in our times of need. And so some people might look at, you know, oil cause they think oil's going to spike. You know, briefly after a hurricane comes through the Gulf and maybe takes, you know, refineries imports offline, you know, this is a much kind of broader focus and strategy that looks at the many different layers and you know, the full kind of timeline of a natural disaster and is providing, you know, many of these different types of companies that are aiding throughout that timeline.

Yeah. So we mentioned Generac and I think that's, you know, a great example that people understand, you know, one company that may most people might not understand is a great lake dredging dock. You know, dredging is really important. Rebuilding coastlines is really important after hurricane Sandy came in great Lake's dredging dock was higher to come and rebuild the coastline. And that was many miles of New Jersey coastline that needed to be rebuilt and have sand and dune levels raised when you had the horizon Gulf oil spill. Um, they also came in, they helped build up the sand Heights so that less oil would make it onto the actual Gulf coast. You have a company like clean harbors that specializes in waste removal. So whether that's, you know, toxic and chemical waste or other types of hazardous waste, many people don't realize, but that's one of the most critical roles following a natural disaster.

When you have flooding, when you have hurricanes, you bring so much debris chemicals and other things that just get washed along with that. And recovering from that is absolutely critical to prevent other medical types of emergencies. You know, we mentioned, you know, home Depot and lows, but you know, similar companies like a west farmer out in Australia is, is providing, you know, similar services for people out there. The Tory holdings is providing the home furnishings and things like that out in Japan when you need them. So, you know, there's absolutely a wide range. You have a, a company like Gorman Rupp that makes pumps and things like that, that you need that help with, you know, wildfires and transfer of water. When you need them. You also have companies that are even helping to build specialized automobiles. So thank you know, fire engines and things like that, that you need highly specialized equipment when you're coming in to help an area recover from a natural disaster.

So what you'll see is a really wide range of diversified companies and you even have, you know, water companies and cuz you mentioned how it's a global fund. You have a company like Skaska, which is, uh, a European company based out of Sweden and they help do all different types of infrastructure, construction consulting, water management treatment, even helping to build up, you know, areas along river beds to help prevent flooding in the future. So, you know, it's not just about rebuilding sometimes it's, you know, building in mechanisms to help you prevent those disasters from being as bad as they may be in the future.

So once a year, the index committee will review the companies and the fund. They'll also go and look at companies that hadn't necessarily previously qualified. And they'll look at the ones that, you know, meet the requirements to put into the fund. So the first run through, they arrived at these currently 62 companies. And every quarter when the fund rebalances, it will bring the waitings for each of those companies back in line. So if you have 62 companies, you divide the total assets of the fund by 62. And that should be the percentage waiting across each of those companies every quarter. So while the names may not necessarily change more than once a year, you know, there's our circumstances where the holdings could change in between, but basically every quarter, those names are being rebalanced right back to an equal weight amongst all of them in the portfolio.

So it's difficult. You know, some companies may be more pure play than others. Some may have, you know, better quarters than other, but they're all providing, you know, these various important use cases during natural disasters or leading up to them. And so to us, it's constantly evolving the companies that are providing these services, the types of storms that may be more devastating one year versus the next, by trying to do something that, you know, just looked at, you know, you know, past storms or things like that, you know, that might not always hold true. You could have a really bad year for earthquakes. And if you've been loading up everything, looking at past storms saying that, you know, hurricanes were gonna be the big one this year, all of a sudden you find yourself, you know, very underexposed. So this was a way to give each of these companies, you know, room to increase or decrease, but bring them back to an equal weight at these re periods.

Absolutely. And that's precisely, you know, the reasons why, you know, this type of strategy to us made sense. It's also very difficult to dig in through each of these companies and pull out specific revenues from natural disasters as well. It's not something that they make readily available and it's only available in extremely few cases across the entire securities industry. So by doing this equal waiting approach, you know, it gave each one an equal opportunity to have an impact on the fund performance.

Certainly they can talk to their financial advisors, but we have a, a wealth of information on our website procure etfs.com. That's procure etfs.com. We have information about UFO, our space fund, as well as FEMA, our natural disaster recovery fund. And we'd be happy to, to speak with anyone that's interested in learning more as well. So if you add your name to the mailing list, we put out your regular pieces, whether micro blogs or industry updates, um, news updates and things like that. So people that want to be alerted to things as they change, they can add themselves to that as well. And, you know, hopefully they can tune back into your Podcasts and we can join you again to talk about updates in the future.

Wonderful. Thank you so much, Kate. It was a pleasure as always.

Have a great day.