6 Things to Know About Investing in the Gig Economy

You’ve likely heard a lot of buzz about the gig economy this year, especially as juggernauts like Uber and Lyft have gone public.

And while you may already participate in the gig economy as a consumer or an independent worker, you may also wonder how you can tap in as an investor. Here’s a look at what the gig economy is and ways to gain access to the nearly $1.4 trillion it’s adding to the U.S. economy annually.

1. What the Gig Economy Is

You may be a bit confused about what the term “gig economy” actually refers to. Does it refer to your Uber driver who picks up a couple extra hours of work here and there on the weekend?

Or does it apply to your friend who’s a freelance web designer and works at an office 40 hours a week? The short answer is the term applies to both types of workers and the companies they work for.

The gig economy consists of companies that support and benefit from a workforce that consists of independent contractors, and temporary and on-call workers who are often enabled by technology to offer their services directly to retail and commercial customers. Workers may be taking on ad hoc, temporary, short-term or even long-term engagements.

Other terms used to describe the gig economy include “sharing economy” and “freelancer economy.” No matter what you call it, the growing number of people who participate in jobs like these suggests that this change in the workforce is here to stay.

2. Who Is Participating in the Gig Economy

Nearly half (47%) of the American workforce has participated in gig work or is currently working independently. That’s a whopping 42 million people, and that number is expected to grow to 52% of the workforce in the next five years.

What’s more, the freelance workforce has increased by 4 million people in just the past five years, according to the 2019 Freelancing in America study by Upwork and the Freelancer’s Union.

Gig workers represent a cross section of the American workforce in terms of age and income. Unsurprisingly, Gen Z makes up the greatest proportion of gig workers, with 53% of that age group freelancing. But other generations aren’t far behind. Millennials (40%), Gen X (31%), and even baby boomers (29%) make up a large portion of the gig workforce.

These changes aren’t limited to the U.S.; the gig economy is a global phenomenon. Consider that up to 162 million people in the E.U. participate in freelance work.

3. The Potential for Growth

The growing number of participants in the gig economy is directly related to growth in this area. The more people who work these jobs, the faster companies who support gig work can grow.

Workers are largely drawn to gig work for the flexibility that it offers. It appears that many full-time workers are interested in making the switch to independent work or taking it up on the side. According to one study from Prudential, nearly a third of full-time workers are strongly interested in switching to gig work.

Once again, this phenomenon stretches beyond the borders of the U.S. A study by Deloitte across 36 countries found that nearly two-thirds of workers want to take up a side gig in addition to their full-time work.

As companies in the gig economy grow quickly, they may experience volatility, especially in their early stages as start-ups. Even the so-called unicorn companies—companies with at least a billion-dollar valuation before going public—can struggle as they try to gain footing on the open market. Consider Lyft’s rocky start after its initial public offering (IPO) earlier this year.

Yet growth potential can be huge. Consider Grubhub, which went public in 2014. As of March 2019, this online and mobile food ordering and delivery marketplace experienced year-over-year growth of 40%.

Compare that with more established tech companies, like Amazon—which celebrated its 25th anniversary this year—and had nearly 17% first-quarter gains in 2019 compared to the same time period in 2018.

4. Why Investors Are Interested in the Gig Economy

Swift growth and the potential for big gains make investing in the gig economy tempting for many investors. Investors may see gig economy investments as a way to help their portfolios take advantage of global trends in labor and technology.

Technology is changing the speed and scale at which workers around the world can find work and at which companies can grow.

Consider the rise of on-demand workforce solutions like WeGoLook, which helps businesses gather and validate information to help reduce risk. The company employs 45,000 independent workers, and companies like this employ millions of people around the world.

Also, technological advances have considerably reduced the amount of time it takes for companies to scale quickly. While it took radio 38 years to attract 50 million listeners, Facebook had 6 million users in its first year, and 600 million users in the next five.

5. How to Access the Gig Economy

The average investor will likely access the gig economy in one of two ways: through individual stocks or through funds, such as technology mutual funds. Some institutional investors may be able to invest directly in IPOs, but for the most part, the barrier to entry is too high for most everyday investors.

Individual stocks typically provide the most direct way for individuals to invest in the gig economy companies they’re interested in. If you’re interested in Uber, you can buy Uber stock directly. Are you more interested in a company that facilitates collaborative and off-site work, like Zoom? You can buy Zoom stock instead.

That said, one issue with buying individual stocks is diversification. A diversified portfolio—which holds a balanced mix of stocks, bonds, and other investments—helps protect you against certain market risks.

For example, if one stock performs poorly, the others in your portfolio may be performing well, lessening the impact of the stock that’s taken a hit. If you’re buying a lot of shares in any one stock, you may throw the balance off in your portfolio.

Alternatively, you may consider mutual funds that invest in technology. Some mutual funds invest thematically, so you may be able to find a fund that invests in initial public offerings, for example.

Mutual funds typically hold a basket of stocks or other investments, so they provide some built-in diversification. They also have the benefit of professional managers who work to balance risk and return inside the fund.

Mutual funds do have a few drawbacks, however. Relatively speaking, they aren’t very transparent: They only disclose their holdings once per quarter. Also, mutual funds can be expensive to buy and hold, because they typically require active management and come with a host of fees, such as load fees.

6. ETFs Provide a Way to Engage With Gig Economy Companies

Exchange-traded funds (ETFs) provide an alternative to mutual funds. Like mutual funds, they can provide diversification through their holdings, but they are more transparent and typically carry lower fees.

They, too, can be actively managed, providing the ability to make swift changes as market and company conditions change. The ETF market also includes IPO and technology ETFs that may give you some access to companies that are part of the gig economy, although there will likely be a mix of stocks from other areas as well.

If you want to learn more about the gig economy and investing, take a look at SoFi’s white paper “Investing in the Gig Economy.”

If you’re interested in an ETF built specifically to invest in the gig economy, consider SoFi’s Gig Economy ETF, which goes by the ticker symbol GIGE.

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As of 5/31/20 the top 10 holdings of the SoFi Gig Economy ETF are as follows: Etsy 2.4%, Pinduoduo 3.4%, PayPal 3.1%, Twitter 2.7%, Square 3.2%, Fiverr 3.8%, Pinterest 1.9%, Uber 2.9%, Upwork 3.4%, and Alibaba 2.6%.

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.[MT[1]

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