Rize unleashes Europe’s first Pet Care ETF

Thematic investment specialist Rize ETF has introduced Europe’s first ETF targeting the global pet care industry.

The fund is also due to be rolled out on SIX Swiss Exchange in Swiss francs (PETZ SW) in the near future.

Pet ownership notably soared during the Covid-19 pandemic as many people turned to furry companions for social support in lockdown.

Rize highlights, however, that increased pet ownership is not transitory and is likely to be sustained due to household formation trends among younger generations such as Millennials and Zoomers.

The firm points to the findings of Morgan Stanley’s AlphaWise survey which show that pet ownership is expected to rise another 14% over the next ten years with two-thirds (65%) of 18- to 34-year-olds planning on acquiring (or adding) a pet over the next five years.

Additionally, pet owners – especially younger ones – were found to be spending persistently more on their pets than previous generations.

These findings, combined with compelling pricing power and inelastic product demand enjoyed by pet care companies, have led Morgan Stanley to predict that the trajectory of US household spending per pet will grow 95% from $980 in 2020 to $1,909 by 2030.

Commenting on the factors driving growth in the pet care industry, Rahul Bhushan, co-Founder and Managing Director at Rize ETF, said: “There are several themes shaping the future of pet care. First, is the trend toward humanization. In the past 20 years, pets have gone from sleeping in our backyards to sleeping in our beds. We now treat our pets like our children. Anthrozoologists like John Bradshaw have argued that pet-keeping is an intrinsic part of human nature and what we’re seeing today with Millennial and Gen Z families is a new, more nurturing type of pet ownership.

“Second, and related, is the decline of the traditional nuclear family. Many single-person households and unmarried and childless families are increasingly adopting pets, and the growth of our aging population has also led to a greater number of furry companions.

“Third, is our digital – and post-Covid – flexible lifestyles. With the rise of WFH, pet adoption has suddenly become a lot easier, and people are making long-term commitments to their pets. For pet care companies, this has meant big business.”

Investment approach

The ETF taps into the pet care theme by tracking the Foxberry Pet Care Index, an index co-developed by Rize, index administrator Foxberry, and research firm Euromonitor International.

The index selects its constituents from a universe of stocks listed in developed and select emerging markets. To be eligible for inclusion, a company must have a market capitalization greater than $750 million and an average daily turnover above $2m.

Harnessing insights from Euromonitor, companies in the universe are assigned thematic relevance scores based on the percentage of revenue derived from four sub-themes related to the pet care industry: food, retail, healthcare, and insurance.

Thematic relevance scores range from 1 to 5. Firms deriving less than 20% of their revenue from the sub-themes receive a score of 1, firms deriving between 20% and 40% of their revenue from the sub-themes receive a score of 2, and so on with firms deriving between 80% and 100% of their revenue from the pet care industry receiving the highest score of 5.

The index selects all constituents with thematic relevance scores of 2 or higher and weights them according to their scores. Reconstitution and rebalancing occur semi-annually.

As of the end of March, the index had 30 constituents and more than three-quarters (75.6%) of its weight was allocated to US-listed stocks with the next-largest country exposures being Brazil (7.1%), the UK (6.5%), and Japan (5.6%).

Notable positions included Pet Center Comercio e Participacoes SA (7.1%), Patterson (6.7%), Petco Health & Wellness (6.5%), Freshpet (6.1%), Idexx Labs (5.7%), and Elanco Animal Health (5.7%).

The ETF comes with an expense ratio of 0.45%.