Thematic investing and thematic ETFs do not focus on sector classifications or geographic boundaries. Instead, they are often constructed to provide exposure to a range of industries that stand to benefit from particular, structural, long-term megatrends.
- Thematic ETFs are ETFs that select underlying holdings based on their exposure to particular investment themes or ideas
- Thematic ETFs are typically agnostic to industry sectors and geographical boundaries
- While thematic ETFs differ from sector ETFs, the reason investors are attracted to them is typically the same – to gain exposure to a particular area of the market
- Investors can use thematic or sector ETFs to gain targeted or tactical exposure, and to complement their core or foundation portfolio allocations
What is thematic investing?
The goal of thematic investing is to identify megatrends and enduring structural forces that will affect the economy over time, and then position one’s portfolio to benefit from those forces, irrespective of the ups and downs of current or future economic cycles.
As most investors know, generating good share market returns requires identifying companies likely to produce healthy earnings and dividends over time.
In pursuing this quest, investors traditionally have had the choice of active managers attempting to pick winners, or passive managers taking a rules-based approach, such as investing in companies that meet criteria relating to price momentum, valuations or financial metrics.
The problem with many of these approaches is that the choice can be governed by short-run – or cyclical – dynamics. Deciding which part of the cycle we’re in, and which companies will do well in that part of the cycle, is no easy task.
The table below summarises the differences between thematic investing and approaches relying on identifying and positioning for short-run economic cycles.
|Thematic or Secular Investing||Cyclical Investing|
|Investment Focus||Megatrends: Disruptive technologies, demographic changes||Geographic regions, sectors of the economy, factors such as momentum, value, quality, volatility|
|Type of change focused on||Structural||Cyclical|
|Investment horizon||Long Term||Short-Mid Term|
|Timing Considerations||Entry and exit timing less important||Entry and exit timing important|
|Illustrative size of portfolio||Smaller universe of securities||Larger universe of securities|
What is a thematic investment strategy?
Thematic investing is when an investor tries to identify long-term transformational trends, and the investments that are likely to benefit if those trends play out.
Thematic investing is explicitly forward-looking, often tapping into economic changes investors can see taking place around them, disruptive technologies, changing demographics and consumer behaviours.
The rise of cybersecurity is a good example, driven by rapidly increasing global spend by governments, corporations, and individuals to prevent cyber-attacks, data theft, industrial espionage, and other hacks.
Advantages of thematic investing
A primary benefit of longer-term investment approaches like thematic investing is that the timing of entry and exit points is typically less crucial than with more cyclically-sensitive investment strategies.
Shown below, the rate of adoption of major technology changes over the past century – such as the telephone, electricity, cars and radio – has been measured in decades. The pace of technological innovation is unrelenting, with more recent changes such as the internet, smart phones and social media just as disruptive, and take-up more rapid.
Adoption of Technology in the US (1990 to 2020)
Source: Asymco, BlackRock
Thematic investing can also improve portfolio diversification, as returns have tended to have low correlation to swings in major regional or sector investment benchmarks.
Thematic investing readily lends itself to a globally diversified passive approach – using rules to identify companies with revenue exposure to a secular trend, and then investing in a broad selection of the leading players from around the world.
Of course, active managers are also able to take a thematic approach to investing. However, they are likely to face just as many challenges ‘picking winners’ from secular change as they currently do in picking winners from cyclical change.
One of the benefits of a passive market capitalisation-based indexing approach is that it tends to increase portfolio weightings to emerging ‘winners’ with rising market cap over time, while cutting exposure to ‘losers’ with declining market cap.
Thematic investing is an approach that resonates with investors, as it taps into economic changes they can see and hear taking place around them every day.
What’s more, many of these megatrends – such as environmental, social, or technology-focused themes – tap into an increasing interest in socially responsible investing.
Megatrends over the coming decades
Some megatrends that may be sustained over the coming decades include:
Who should invest in thematic funds? Tips for investors
An investor’s time horizon, tolerance for risk and overall investment goals are important considerations when deciding whether to buy into or sell out of any investment.
The main benefit of thematic ETFs lies in the possibility of gaining investment exposure to a specific theme.
While broader-based indices such as the Nasdaq-100 Index are often the focus of much of the discussion in investing communities, if an investor is seeking a specific type of technology exposure, such as robotics & A.I or cybersecurity, a thematic ETF may be worth considering.
As another example, a broader-based index such as the S&P/ASX 200 provides access to the top 200 companies in Australia, but if an investor is seeking exposure to Australian technology companies specifically, they might consider a thematic ETF such as BetaShares S&P/ASX Australian Technology ETF (ASX: ATEC).
Like all investment approaches, thematic investing is not without risk. Given the long-term nature of mega-trends, there is the risk that the trend will take longer than expected to be established – or even that it does not materialise at all.
In saying that, we believe thematic exposures can provide strong potential for returns as part of a well-diversified portfolio, as well as exposure to markets that may have previously been difficult, or impossible, to access.
Beyond a broad investment strategy, probably one of the most important considerations is to determine the quality of exposure an ETF, and the index it tracks, provides to the chosen theme.
Ideally, the index should provide a ‘pure-play’ exposure.
In other words, the basket of securities in the index should represent the particular theme or sector without its focus being diluted by exposure to other themes or sectors.
In making this assessment, an investor can look at things such as the thematic index’s correlation with the broader market, and the overlap in holdings between the thematic index and the broader market index.
A low correlation, and relatively few overlapping holdings, tends to be a good indicator of a strong pure-play exposure.
It’s also important to keep an eye on costs. Index-tracking thematic ETFs tend to be lower cost (and arguably more cost-effective) than actively managed thematic funds.
How to invest in thematic funds
It’s never been easier for investors to gain diversified, transparent and cost-effective exposure to these major investment themes shaping our world with exchange traded funds.
These are some of the global thematic investment opportunities we’ve identified and the ETFs we’ve introduced to the market that offer exposure to these trends.
ETFs seeking to benefit from tomorrow’s global megatrends
|ASIA||BetaShares Asian Technology Tigers ETF||Exposure to Asian technology companies such as Tencent, Alibaba and Taiwan Semiconductors|
|RBTZ||BetaShares Global Robotics and Artificial Intelligence ETF||Exposure to global companies engaged in the sale or development of robotics and artificial intelligence technology|
|HACK||BetaShares Global Cybersecurity ETF||Exposure to the world’s leading cybersecurity companies|
|CLDD||BetaShares Cloud Computing ETF||Exposure to some of the world’s leading companies in the cloud computing industry|
|ATEC||BetaShares S&P/ASX Australian Technology ETF||Exposure to leading ASX-listed companies in a range of tech-related market segments such as information technology, consumer electronics, online retail and medical technology|
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