Three Megatrends Shaping the Future and How to Invest in Them with ETFs

Supply chain reshoring

When people think of "reshoring," it's usually in the context of bringing manufacturing back to domestic soil. For example, car manufacturers moving production back to the U.S. or electronics companies setting up factories in North America.

However, another critical aspect of this trend is the reshoring of supply chains. In layman's terms, reshoring supply chains means relocating the entire network of suppliers, manufacturers, and logistics closer to the home market.

This encompasses everything from raw material sourcing to component manufacturing and final assembly, ensuring that these processes are geographically closer to the end consumers.

According to Deloitte, this movement is the result of several recent events that have highlighted the fragility of a globalized supply chain. Factors include rising global wages, volatility in shipping costs, taxes and duties, defect rates, brand reputation, the lingering impacts of the COVID-19 pandemic, and higher sustainability expectations.

Deloitte emphasizes the potential benefits of reshoring supply chains within a "closer-to-customers strategy." This approach reduces transportation bottlenecks and, more importantly, lowers costs. In particular, they found that for sectors like machinery, consumer appliances, and furniture, the soaring transportation costs in 2021 made the reshoring option much more attractive.

"Global supply chains are transitioning as the pre-pandemic model of manufacturing goods abroad shifts to a model where goods are manufactured in North America," says Eli Horton, Senior Portfolio Manager of TCW Active Equity ETFs  at TCW ETFs. “This shift is already happening with $1.2 trillion in capex announcements between January 2021 and 1Q24.”

The specialized ETF to watch here is the TCW Transform Supply Chain ETF

. This actively managed ETF features a high-conviction portfolio of 25 holdings with a 0.75% expense ratio.

It includes many wide-moat, natural monopoly companies such as Waste Connections, Waste Management, Norfolk Southern, Martin Marietta, Canadian Pacific Kansas City, and semiconductor titans like Nvidia and Taiwan Semiconductor.

Energy transformation

The debate over fossil fuels versus renewables only scratches the surface of what arguably should be viewed as a paradigm shift in not only how we produce energy but also how we consume it.

“The planet’s energy and power systems – and the businesses that are the greatest consumers of energy – are undergoing dramatic change,” Hortonexplains. “Businesses that produce, use, and move energy more efficiently will drive enormous value. “

The International Energy Association’s (IEA) World Energy Outlook 2023 sets out some bold predictions for 2030 when it comes to this anticipated shift:

• Nearly 10 times as many electric cars on the road worldwide.
• Solar PV generating more electricity than the entire current U.S. power system.
• Renewables’ share of the global electricity mix nearing 50%, up from around 30% today.
• Heat pumps and other electric heating systems outselling fossil fuel boilers globally.
• Three times as much investment going into new offshore wind projects than into new coal- and gas-fired power plants.

Importantly, the IEA based these projections on current government policies, not prospective ones. Accordingly, a stronger movement towards more active national energy and climate pledges should accelerate both spending and adoption.

“This transformation will require unprecedented investment – more than $5 trillion annually by some estimates,” Hortonsays. “These investments are required in infrastructure, materials, and ‘old-economy’ companies.”

The ETF for this transformative task is the TCW Transform Systems ETF

. This actively managed ETF features a high-conviction portfolio of 26 holdings with a 0.75% expense ratio.

This fund invests across various sectors, including utilities, industrials, technology, and energy. Notable holdings include Vistra, Republic Services, Microsoft, and Exxon Mobil..

Artificial Intelligence (AI)

Finally, no discussion about megatrends would be complete without highlighting the potential of AI. The economic value here can be found not just within the AI ecosystem, but also outside of it. Consider the following:

1. Generative AI Capabilities: Generative AI is not only able to generate human-like text and images, but also video and music, transforming content creation across industries.
2. Investment in GPUs: Large tech companies are investing billions in the latest GPUs from Nvidia[1], with demand far outstripping supply.
3. AI in Healthcare: AI is revolutionizing healthcare by enabling more accurate diagnostics, personalized treatment plans, and efficient drug discovery.
4. Autonomous Systems: AI is driving advancements in autonomous vehicles, drones, and robotics, enhancing productivity and safety in various sectors.

McKinsey crunched the numbers and estimated that AI could add the equivalent of $2.6 trillion to $4.4 trillion annually across 63 unique use cases[2], mostly in four areas: customer operations, marketing and sales, software engineering, and R&D.

They also believe that it will have the biggest impact in some already high-growth sectors—banking, high tech, and life sciences in particular, with tech potentially realizing $200 billion to $340 billion annually [3]if the use cases were fully implemented.

For this role, the TCW Artificial Intelligence ETF

is available, featuring 35 holdings for the usual 0.75% expense ratio. “AIFD has a seven-year track record of results – we were investing in the space long before the generative AI boom of the past year,” says Bo Fifer, Lead Portfolio Manager of the TCW Artificial Intelligence ETF.

This ETF is actively managed to include companies across sectors building core technology, AI systems and those adopting AI,. Familiar names include Nvidia, Alphabet, Microsoft, as well as innovative positions including Arista Networks and Symbiotic .

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.

[1] Kylie Robison (2024, February 22). Customer demand for Nvidia chips is so far above supply that CEO Jensen Huang had to discuss how ‘fairly’ the company decides who can buy them. Fortune.com Blog. Retrieved from https://finance.yahoo.com/news/customer-demand-nvidia-chips-far-013826675.html

[2] McKinsey & Company (2023, June 14). The Economic Potential of Generative AI: The Next Productivity Frontier. McKinsey & Company Report. Retrieved from https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/the-economic-potential-of-generative-ai-the-next-productivity-frontier#introduction

[3] McKinsey & Company (2023, June 14). The Economic Potential of Generative AI: The Next Productivity Frontier. McKinsey & Company Report. Retrieved from https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/the-economic-potential-of-generative-ai-the-next-productivity-frontier#introduction