In Focus: Megatrends  

What advisers need to know about thematic ETFs

  • To learn about thematic investing and be able to put it in context
  • To understand how thematic funds fit into a portfolio
  • To understand the benefits and pitfalls of thematic ETFs
CPD
Approx.30min

This amazing new technology, driven by the internal combustion engine, spawned thousands upon thousands of different car manufacturers all over the world. However, the number of car manufacturers that survived and turned out to be viable over the longer term can almost be counted on one hand.

Thematic ETFs can provide access to industries which fundamentally change the way we do things (Image credit: Jose Mueses)

This example represents the biggest problem for investing in mega-trends; you believe the new technology or industry will grow and fundamentally change the way we do things, but how do you gain access to this growth when there are usually more losers than winners over the long term or, at least, very few big winners. Investing in a thematic ETF can potentially solve this issue to an extent.

While thematic ETFs can be a great way to gain low-cost diversified exposure to different themes, they are not immune to bubbles, such as the dotcom excitement we witnessed in the late 1990s and early 2000s.

The hype around the internet (a mega-trend) led to excessive speculation of internet-related companies purely on the basis of their name or the sector/industry they were in.

Investors become obsessed with certain types of company rather than the fundamentals and whether the company made a profit. In many instances, investors did not even know what the companies they were buying did.

This is something to watch out for in thematic ETFs, in case the hype around the theme does not play out as expected.

What thematic ETFs are currently available?

iShares have a suite of thematic ETFs that offer access to five different mega-trends they have identified.

The most popular of these is the iShares Global Clean Energy ETF, which invests in companies involved in the provision and production of clean energy equipment and energy itself.

When looking under the bonnet of the ETF, it only holds approximately 75 companies and the top 10 holdings account for just over 50 per cent of the fund. This highlights the higher levels of concentration these ETFs can have over more traditional ETFs.

Wisdom Tree is another ETF provider that offers a range of thematic ETFs. Its range offers products that track one of their six identified mega-trends.

The most popular of these is the Wisdom Tree Battery Solutions ETF that tracks the performance of companies involved in battery and energy storage solutions. While this ETF offers diversified exposure across the battery and energy storage solution industry, it does have a significant exposure to China (25 per cent). 

What to look out for when picking thematic ETFs

As with picking any ETF there are a number of key things to look out for when selecting a thematic one.