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Investing in thematic exchange-traded funds

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What's a thematic exchange-traded fund (ETF) and how do you invest in one? We chatted with fund providers BetaShares, ETF Securities, and VanEck to find out.

17 February 2022

8 min read

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Thematic exchange-traded funds (ETFs) invest in a number of different companies across a specific theme, trend, or sector—whether it be renewable energy, healthcare, gender diversity, or video gaming … the list goes on! Like most ETFs, thematic ETFs typically track an index; as companies gain and lose value within the index, the ETF buys and sells investments to match the makeup of the index.

With thematic ETFs, investors get diversified exposure to a particular theme, rather than limiting their exposure to any one company in that theme. The themes are often aimed at predicting long-term, structural shifts in society, giving investors an opportunity to back the future they believe in.

Due to their narrow focus, thematic ETFs can be riskier and more volatile than ETFs that invest across a broader range of sectors and investments. Investors might manage this risk by investing a portion of their portfolio in a thematic ETF, and diversifying the rest into other investments. Fees for thematic ETFs also tend to be higher than other ETFs, which can have an impact on overall returns.

To find out more about thematic ETFs, we chatted with Ilan Israelstam (Chief Commercial Officer at BetaShares), Kanish Chugh (Head of Distribution at ETF Securities), and Arian Neiron (CEO and Managing Director - Asia Pacific at VanEck)—BetaShares, ETF Securities, and VanEck provide access to thematic ETFs available on the Sharesies platform.

What’s driving the growth in popularity of thematic ETFs?

Ilan (BetaShares)

In Australia, we’ve seen funds under management in thematic ETFs grow from $2.3 billion to $4.26 billion over the course of 2021.

Thematic ETFs combine the inherent benefits of ETFs (namely convenience, diversification, transparency, and cost-effectiveness) with exposure to long-term megatrends that are changing the way we live, work, and play. We’ve found that investors are particularly attracted to long-term, secular growth themes, such as cybsersecurity, efforts to address climate change, and robotics.

Kanish (ETF Securities)

While thematic ETFs may have started on the fringes of financial services, they’ve come a long way. Critics used to say that thematic ETFs were “just fads chasing other fads”. Now, it’s not hard to think that there could be over $10 billion invested in thematic ETFs in a few short years, up from $2 billion at the end of 2020.

Over the past 18 to 24 months, we’ve seen an increase in investor adoption and the number of thematic ETFs being issued by providers. We’ve also seen a growing understanding of the benefits that thematic ETFs offer, particularly from a younger demographic of investors.

Arian (VanEck)

Over the past five years (as at December 2021), we’ve seen a 213.8% compound annual growth rate of thematic ETFs in Australia, with over 23 thematic ETFs now listed on the Australian Securities Exchange (ASX). Thematic ETFs are identifiable and structural growth trends, meaning they’re not just something in vogue. They represent more targeted growth opportunities that generally aren’t correlated to mainstream investment benchmarks like the S&P 500.

A major driver of the growth in popularity of thematic ETFs is investors being able to align their investments with how they see the world changing—along with the likes of societal changes, capital expenditure by the private sector, and importantly, government policy.

Ilan (BetaShares)

As the world evolves and new trends emerge, so too do opportunities for new thematic ETFs. For example, our Crypto Innovators ETF (ASX: CRYP) offers investors exposure to companies that represent the picks and shovels of the digital assets ecosystem, and our Electric Vehicles & Future Mobility ETF (ASX: DRIV) offers exposure to the revolution currently taking place in the automatic industry—both being sectors that really didn’t exist in investable form some 3-4 years ago.

Additionally, while technology-oriented exposures continue to dominate the thematic ETF space, thematic funds do extend beyond technology. For example, our Climate Change Innovation ETF (ASX: ERTH) provides a simple way for investors to add exposure to the global companies that are leading efforts to address climate change and other pressing environmental problems.

Kanish (ETF Securities)

At ETF Securities, we strongly believe in the concept of megatrends that represent long-term structural themes that will be a force of disruption, innovation, and growth for more than 10 years. This approach aligns itself with how investors should view thematic investing, which is to adopt a long-term lens.

We’ve also seen increased investor interest in our Battery Tech & Lithium ETF (ASX: ACDC) and Hydrogen ETF (ASX: HGEN). Both battery technology and hydrogen are seen as future technologies that will help the world reduce greenhouse gas emissions and get closer to a net-zero target. These industries are also garnering government support, which can be one of the best ways for an investor to differentiate a fad from a megatrend.

Arian (VanEck)

We consider video games and e-sports as a significant thematic opportunity that is underrepresented in the S&P 500. Investors seek to invest in these companies specifically, and a thematic ETF like our Video Gaming and eSports ETF (ASX: ESPO) offers a pure play approach to do that. Companies such as Electronic Arts (EA) and Nvidia offer opportunities to not just publishing or software, but also the likes of hardware such as semiconductor chips and processors.

One of the biggest trends in the thematic space is Clean Energy opportunities such as our Global Clean Energy ETF (ASX: CLNE), which offers investors a pure play exposure to the likes of renewable energy such as solar and hydro, as well as clean energy technology and equipment.

What’s your view on the future of thematic ETFs?

Ilan (BetaShares)

We believe that the entire ETF industry still has many years of high growth ahead, and thematic ETFs will play a key role in the ongoing expansion of the industry. At BetaShares, we’re working hard to develop new ETFs in 2022 that will give investors exposure to an increasing number of megatrends—including our Video Games and E-Sports ETF (ASX: GAME) and Online Retail & E-Commerce ETF (ASX: IBUY).

While thematic ETFs may be an interesting opportunity for investors, they can also be more volatile. Instead of making thematic ETFs the core of an investment portfolio, investors may want to build out the core of their portfolio with low-cost building blocks that offer broad exposure to Australian and international equities, fixed income, and other asset classes. With these foundations in place, thematic ETFs can be used to tilt portfolios to the megatrends that investors are interested in.

Kanish (ETF Securities)

In Australia, we’re starting to see more thematic ETFs being launched into the market, but there are still many megatrends we don’t have exposure to. When investing in thematic ETFs:

  • Do your own research. At ETF Securities, we have a raft of information available; don’t be afraid to pick up the phone or send an email if you have any questions.

  • If you’re investing with a long-term lens, make sure that the thematic ETF you’re investing in is representative of a long-term megatrend. As thematic ETFs offer investors exposure to areas of high innovation and disruption, they can be more volatile compared to traditional markets.

  • Use the information provided by the fund issuers and lift the lid of the ETF to see how well it provides exposure to the megatrend you’re trying to target. How does it go about identifying the companies driving a trend? How are they weighted when the index is rebalanced? What’s the overlap between this fund and any other funds or ETFs an investor might already have? A good thematic ETF should give true-to-label exposure, have a process for picking the right companies, and not hug a famous benchmark.

  • Ask yourself if the fund aligns with your views and values.

Arian (VanEck)

Our view is that growth will continue, although it may moderate. There are many opportunities as the world is constantly changing. Ageing demographics, emerging markets growth surpassing developed markets, climate change requiring an energy transition, video games and e-sports surpassing traditional media based on audience sizes, and more.

The challenges are identifying those companies that are concentrated in those specific secular trends based on their revenue, assets, and geographic profiles. Investors should be mindful of concentration risks, overlap of companies that are involved in a secular trend but only on the fringes, and importantly, themes that hold little substance or investment merit. Investors' portfolios may already be holding companies that are involved in where they want their money to be allocated—it’s important to look through a thematic ETF and ensure that it’s a pure play exposure.

Wrapping up

Thanks to Ilan, Kanish, and Arian for their insights! If you’re interested in exploring thematic ETFs further, some of the thematic ETFs available on the Sharesies platform include:

  • Sustainability: BetaShares Global Sustainability Leaders ETF (ASX: ETHI), BetaShares Australian Sustainability Leaders ETF (ASX: FAIR), VanEck MSCI International Sustainable Equity ETF (ASX: ESGI), VanEck MSCI Australian Sustainable Equity ETF (ASX: GRNV)

  • Crypto: BetaShares Crypto Innovators ETF (ASX: CRYP), Proshares Bitcoin Strategy ETF (NYSE: BITO)

  • Religious beliefs: SP Funds S&P 500 Sharia Industry Exclusions ETF (NYSE: SPUS), Global X S&P 500 Catholic Values ETF (NASDAQ: CATH), Inspire Global Hope Large Cap ETF (NYSE: BLES)

  • Cybersecurity: BetaShares Global Cybersecurity ETF (ASX: HACK)

  • Ethical investments: Vanguard Ethically Conscious International Shares Index ETF (ASX: VESG), Vanguard Ethically Conscious Australian Shares ETF (ASX: VETH), BetaShares Ethical Diversified High Growth ETF (ASX: DZZF)

  • Property: Vanguard Australian Property Securities Index ETF (ASX: VAP)

  • Renewable energy: ETFS Hydrogen ETF (ASX: HGEN), VanEck Global Clean Energy ETF (ASX: CLNE)

Before you invest in a thematic ETF, make sure to do your due diligence, and consider your risk tolerance, goals, time horizon, and values.


Ok, now for the legal bit

Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.

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