Investing in the Gig Economy

Introduction

The gig economy signifies the change in how work is done. It is the ecosystem that allows you to work remotely from seemingly anywhere. It provides the tools to create your side business that may one day become your second career. It allows established organizations to function without all of their employees under one roof. A study released by DaVinci Payments found an estimated increase of 23 million participants vs. 2019. Gig wages and participation grew 33% in 2020 to represent 93 million U.S. adults earning $1.6 trillion compared to the 70 million adults who earned $1.2 trillion in 2019.¹

The gig economy has become a fundamental attractive solution for employers and workers alike. In many ways COVID legitimized gig work; many Fortune 500 CEOs agree that the gig economy is the new future of work and now all Fortune 500 firms use talent platforms that provide on-demand access to workers ². For workers it offers flexibility.

Many investors are quite familiar with gig economy companies. They are already engaging with them as customers and/or workers. And now they want to invest in them too. But while they are easily participating in the gig economy – finding work online, sending and receiving payments online, and ordering dinner and their pet’s food online – until recently, it has been difficult to access this area’s growing investment opportunities.

While many of the brands that consumers know and love such as Airbnb and Fiverr have made Initial Public Offerings (IPOs), they are inaccessible to most individual investors; established gig economy stocks have sky-high stock prices; and most funds don’t fully represent the sectors growth.

The purpose of this paper is to define the gig economy; why it can be an attractive long-term, high- growth investment opportunity; and the way to access this global dynamic sector.

What is the Gig Economy?

The “gig economy” refers to the group of companies that embrace, support or otherwise benefit from a workforce where independent consultants, contractors, temporary, or on-call workers are empowered to create their own freelance business by leveraging recent developments in technology platforms that enable individuals to offer their services directly to retail and commercial customers. In its best form it represents the personalization of employment and empowerment of workers. For businesses, it’s about being able to tap into on-demand talent in a convenient and customized manner.

Examples of gig economy businesses include selling or reselling products through auction platforms or web-based stores and offering delivery services through an app-based platform. Via digital talent platforms, Gig workers are doing ad hoc work, short-term engagements, temporary contracts, or long- term or occasional contracting.

There are a number of new terms being created as the gig economy grows, such as the:

• freelancer economy

• sharing economy

• independent workforce

• solopreneurs

Solopreneurs are sole proprietors who, rather than hiring a full-time team, contract with other gig workers in areas of web design, IT, marketing, sales, accounting, etc., which expands the gig ecosystem further. Regardless of the terms used, the growing number of workers involved and companies supporting the gig economy are clear signs that the nature of work as we know it is forever changed.

Growing Gig Workforce: Independent workers are a significant part of today’s workforce. Nearly half – 48% – of the U.S. adult workforce is either currently working as an independent or has at some point during their career. Over the next five years, that figure is projected to grow to 54%.³

According to a study by Upwork and the Freelancers Union, the freelance workforce grew at a rate three times faster than the U.S. workforce overall between 2014 and 2018. At its current rate, the majority of the U.S. workforce will be freelancing by 2027. ⁴

From 2004 to 2016, the EU28 freelancers’ population grew from 6.2 million to nearly 10 million, a 45% increase, whereas from 2000 to 2014 the growth was even higher at 82.1%. ⁵

Growing Number of Gig Companies: The more that people work in and interact with the gig economy, the more gig companies will be created and rapidly grow. While startups may experience volatility, consider their high-growth potential. For example, in the third quarter of 2020, the revenue of Fiverr was $52.3 million, an increase of 88% over the prior year;⁶ the net revenue of Square was $3.3 billion, up 140% over the same period in 2019;⁷ and the revenue of Shopify was $767.4 million, a 96% increase from the third quarter of 2019.⁸

Since going public in December 2020, the share price of Airbnb has increased 200%, and Airbnb’s market cap of $130 billion is larger than all the other online travel booking sites.⁹

Workforce Demographics

Gig workers represent all ages, income levels and skills across sectors. Their demographics closely resemble the U.S. workforce as a whole. Baby Boomers (aged 57-75) and Millennials (aged 25-40) dominate both the U.S. workforce and the gig economy. In 2020, gig workers were 16% Gen Z (aged 6-24), 33% Millennials, 25% Gen X (aged 41-56), and 26% Baby Boomers.¹⁰ Almost half (47%) of working Millennials freelanced in 2018.¹¹

Twenty-one percent of full-time, highly-skilled independents (technology, accounting, web development and design, marketing) reported earning $100,000 or more in 2019, up from 12.5% in 2011.¹² And 37.6% of permanent, full-time gig workers hold graduate degrees. ¹³

While the tech industry has the most freelancers, there are also gig workers in finance; agriculture and forestry; transportation; education; healthcare; retail; construction; and many varied services from running errands, cleaning and dog walking.¹⁴

Why Invest in the Gig Economy?

More investors and their financial advisors are considering the gig economy as a potential high-growth investment and an effective way to have their portfolios benefit from long-term, global labor and technology trends.

Declining/Changing Work Force: Many countries around the world have been seeing declining birth rates for decades, which is reducing their labor pools and therefore forcing companies to find an alternative workforce. COVID has forced the exit of millions of people who cannot work and meet the increased demands at home at the same time.

Many of them are looking for flexible schedules and prefer remote jobs so they can manage home- learning and other personal demands, not just in the short term but also longer term.

More businesses are viewing talent as networked ecosystems and are taking steps to create business talent models that integrate internal and external workers in teams, blending full-time/permanent hires with freelance, contract, or on-demand talent for flexibility, speed and workforce sustainability.

Technology Advancements: Rapidly accelerating technological changes in processing power and connectivity have created a data revolution, which is placing unprecedented amounts of information in the hands of consumers and businesses and enabling a proliferation of technology-enabled business models like GrubHub and Lyft.

In emerging countries, technology offers economic progress for billions of people at a speed that would have been unimaginable without the mobile Internet. According to Statista, the current number of smartphone users in the world is 3.8 billion (48% of the world’s population). This is considerably higher than 2016 figures of 33.58% of the population.¹⁷

The furious pace of technological innovation is shortening the lifecycle of companies,¹⁸ enabling rapid introduction and adoption of gig-related tools and platforms. Equally, it is changing the economies of scale equation, allowing small companies to compete in a global marketplace. Businesses such as WhatsApp can start and gain scale very quickly and enjoy advantages over large, established businesses.

New online talent networks are being created, companies such as The Mom Project, The Second Shift and WeGoLook, which together manage over $2 billion in outsourced activity, employing hundreds of millions of people in every geography around the globe. Ultimately, many believe the growing development and acceptance of technology may disintermediate the employment model.¹⁹

How to Access the Gig Economy?

Investors typically use the following investment vehicles to access a portion of the gig economy: individual securities, IPOs and SPAC stocks, and/or technology or thematic funds. Each have their advantages and disadvantages.

 Single Stocks: There are two advantages of owning individual stocks: they don’t have any management fees and they are typically liquid. When buying individual stocks, investors don’t have to pay the fund company an annual management fee for investing their assets. Instead, they pay a fee when they buy and sell the stock. Most stocks trading on a major exchange can be easily bought and sold, providing investors the flexibility and liquidity when they need it.

The disadvantages of owning individual stocks include lack of diversification, difficulty in accessing them if the share price is exorbitantly high and time consuming. Investing in one or only a handful of stocks is risky because the investor’s portfolio can be severely impacted when one of the stocks declines in price. And in the case of high-growth stocks such as gig companies, price volatility may be higher. Burton Malkiel, author of A Random Walk Down Wall Street, says that a portfolio of 20 different stocks similarly weighted and diversified across sectors can reduce the total risk of a portfolio by 70%.²⁰ This can add up to a large sum of money depending on each stock’s share price, and trading costs can quickly eat returns.

Finally, it is time consuming to research and monitor stocks while also staying on top of industry and macro-economic trends. The disadvantages of stocks lead many investors and financial advisors to choosing funds instead.

IPO and SPAC Stocks: The explosive growth of the gig economy means there will be IPOs and special purpose acquisition company (SPAC) stocks coming to market. Investors and their financial advisors will likely consider investing in them but among the challenges are determining which to select and when to invest in them.

Technology or Thematic Mutual Funds: An alternative to investing in single stocks or IPOs is to invest in technology or thematic mutual funds, which invest across sectors related to a common theme. Both types of funds may have a percentage of their holdings in gig economy securities. While a fund will typically be diversified, cost effective, liquid, and have a portfolio manager, the main disadvantages are some funds disclose their holdings only every 90 days, so investors do not have full transparency in what they own. And funds that focus on technology or an IPO theme, for example, are not fully representing the gig economy.

Exchange Traded Funds (ETFs) Alternative

ETFs can offer a compelling alternative option for accessing the gig economy. ETFs are well known for their low annual expense fees, transparency of holdings and diversification. They are also considered by investors to provide liquidity, though there is no assurance that an ETF will trade with sufficient volume to provide liquidity and low trading volume may result in an ETF trading at a premium or discount price.24 For an investor or financial advisor interested in getting the broadest exposure to the gig economy, of the benefits listed above, the one most likely to be of highest importance is diversification. This is for two reasons:

One, when investors are trying to get as much return as they can for the least amount of risk, a top concern should be diversification. A well-diversified portfolio is designed to reduce the potential impact of any single holding’s volatility. It’s important to remember that diversification does not ensure profit or protect against loss when the overall market declines.

Two, the gig economy has an expansive definition, encompassing large-, mid- and small-cap stocks; nearly all sectors; and many developed, developing and emerging market countries. Therefore, a broadly diversified gig economy ETF can help an investor fully access the breadth of the ecosystem.

The Value of an Actively Managed ETF

There is not a gig economy index for passive managers to track, but if there were one, most experts would say the best way to generate greater opportunities for enhanced returns in a rapidly growing, ever-evolving gig economy would be through active management. Why? Active managers can be much more nimble than passive managers who must adhere strictly to the rules of an index.

Active managers can make portfolio changes quickly as conditions of the market or companies change. For example, in March 2020, when the global pandemic shut down the economy the portfolio managers of the SoFi Gig Economy ETF quickly rotated towards the platforms and systems that would allow the COVID economy to thrive such as Fiverr, Upwork, Square, and Paypal.

Active managers have the flexibility to add new IPOs sooner than index providers. This can be important as more gig companies go public.

About the SoFi Gig Economy ETF (GIGE)

GIGE is the first ETF to seek long-term capital appreciation concentrating specifically on companies involved in the revolutionary shift towards a gig economy. GIGE is very much a theme of themes by tapping into the global trends in the workforce and technology, providing access to the companies that have transformed the way people access goods, services and work. The fund is actively managed by Toroso Investments to keep on top of emerging companies and market trends and conditions. The fund is structured so most companies that IPO and fit GIGE’s criteria can be included in the portfolio after one month of trading, as opposed to traditional passive funds that typically wait 60 to 90 days to include a new IPO.

GIGE’s breadth of holdings represents the broadest definition of the gig economy to tap into its high- growth potential. GIGE’s holding are approximately 40-50% outside the U.S. and include large-, mid- and small-cap securities. Their investment strategy considers many household gig names, but they also use a “pick-and-shovel” strategy, meaning they research many companies that support the gig economy.

GIGE companies include four categories:

Platform Businesses: This is likely what most people think of when they hear gig economy. This category includes: app-based platforms, web-based stores, auction sites, and other commission-based platforms such as Alibaba, eBay and Etsy.

Services and Transactions Businesses: This includes companies that facilitate transactions and support the operations of the gig economy such as DocuSign, PayPal and Square.

Marketing Businesses: Traditional marketing is expensive and doesn’t work in the gig economy. However, social media and messaging companies work well and therefore make up a large portion of this segment. Examples include Eventbrite, Facebook, Tencent, and Twitter.

Ancillary Businesses: This category includes non-traditional companies, such as HealthEquity, that are not directly related to the gig economy but support and/or benefit from the gig economy.

Conclusion

The SoFi Gig Economy ETF offers a compelling investment option for investors and financial advisors to position portfolios to help benefit from global demographic changes and technology innovations. Investors are already engaging with the rapidly growing gig economy and now they can more readily invest in it.

About SoFi
SoFi helps people achieve financial independence to realize their ambitions. Our products for borrowing, saving, investing, and protecting give our more than one million members fast access to tools to get their money right. SoFi membership comes with the key essentials for getting ahead, including career advisors and connection to a thriving community of like-minded, ambitious people. SoFi is also the naming rights partner of SoFi Stadium, home of the Los Angeles Chargers and the Los Angeles Rams. For more information, visit SoFi.com or download our iOS and Android apps.

About Toroso Investments
Toroso Investments connects financial thought leaders in the ETF space to financial advisors, ETF issuers and other key players in the industry. Toroso serves as an asset manager, offers portfolio management / trade execution services, is an advisor / sub-advisor to several ETFs, and includes its own Private Client Group that equips financial advisors with the tools they need to be effective investment managers. For more information, go to http://torosoinv.com

Before investing you should carefully consider the Fund’s investment objectives, risks, charges, and expenses. This and other information is in the prospectus. A prospectus may be obtained by visiting www.sofi.com/invest/etfs/. Please read the prospectus carefully before you invest.

There is no guarantee that the Fund's investment strategy will be successful. Shares may trade at a premium or discount to their NAV in the secondary market, and a fund's holdings and returns may deviate from those of its index. These variations may be greater when markets are volatile or subject to unusual conditions. A high portfolio turnover rate increases transaction costs, which may increase the Fund's expenses. The Fund is new and has a limited operating history. You can lose money on your investment in the Fund. Diversification does not ensure profit or protect against loss in declining markets. Investments in foreign securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investing in emerging markets involves different and greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets. Because the Fund may invest in a single sector, country or industry, its shares do not represent a complete investment program. As a non-diversified fund, the value of the shares may fluctuate more than shares invested in a broader range of industries and companies because of concentration in a specific sector, country or industry. Since the Fund is actively managed it does not seek to replicate the performance of a specified index. The Fund may frequently trade all or a significant portion of its portfolio; and have higher portfolio turnover than funds that do seek to replicate the performance of an index.

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Footnotes:

1 DaVinci Payments, “Gig Economy 2021,” 2021.
2 Fuller, Joseph, M. Raman, A. Bailey, and N. Vaduganathan, “Rethinking the On-Demand Workforce,” Harvard Business Review magazine (Nov.-Dec. 2020).
3 MBO Partners, “The State of Independence in America 2020,” 2020.
4 Upwork and Freelancers Union, “Freelancing in America: 2018," October 31, 2018.
5 https://www.euro-freelancers.eu/government-surveys-freelancers/ 
6 https://investors.fiverr.com/press-releases/press-releases-details/2020/Fiverr-Announces-Third-Quarter-2020-Results/default.aspx
7 https://www.fool.com/investing/2021/02/10/why-im-never-selling-my-square-stock/ 
8 https://news.shopify.com/shopify-announces-third-quarter-2020-financial-results
9 https://www.cnbc.com/2021/02/11/airbnb-vs-expedia-traders-on-which-stock-theyre-backing.html
10 MBO Partners.
11 Upwork and Freelancers Union.
12 MBO Partners.
13 Deloitte, “Deloitte Insights: 2019 Global Human Capital Trends” report.
14 Ibid
15 Upwork and Freelancers Union, “Freelancing in America: 2019,” October 3, 2019.
16 Upwork, Freelance Forward 2020, The U.S. Independent Workforce Report, Sept. 2020.
17 https://www.statista.com/statistics/330695/number-of-smartphone-users-worldwide/ 
18 McKinsey, “Four Global Forces Breaking All the Trends,” April 2015.
19 Deloitte 2019 Global Human Capital Trends report.
20 Burton Malkiel, A Random Walk Down Wall Street, 1973.
21 BCG, “The New Freelancers: Tapping Talent in the Gig Economy,” Jan. 17, 2019
22 Fuller, Joseph, M. Raman, A. Bailey, and N. Vaduganathan, “Rethinking the On-Demand Workforce,” Harvard Business Review magazine (Nov.-Dec. 2020).
23 TechRepublic, “Report: The gig economy will return in full force in 2021,” Dec. 21, 2020.
24 etf.com, “Understanding Premiums and Discounts.”

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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