ETFs - Spring 2017  

How to identify future trends in ETFs

  • Learn the trends and themes investors can get exposure to through ETFs.
  • Understand why ETFs might be a suitable vehicle through which to access megatrends.
  • Grasp how thematic active and passive investing compares.

“We basically get an enormous amount of information on each and every company. Now FactSet classifies companies. Rather than on the typical 11 sectors, it goes down another six levels of classification to allow us to really hone in on exactly what the company is doing.”

Not every company will be a winner 

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Not everyone agrees that EFTs represent the best way to gain exposure to specific investment themes.

While the option to hold a vast array of potentially game-changing stocks and pay lower fees may appeal to many, others such as Laith Khalaf, senior analyst at Hargreaves Lansdown, argue that an experienced manager is required to distinguish the Googles from the Yahoos.

“I’m not fully convinced that ETFs necessarily offer the best way to go about gaining exposure to particular areas because within that there might be companies that are winners and companies that are losers,” he says.

"Once you start down that route of filtering the universe in such a contrived way, I think you are better off going active. Actually getting an active manager to look over whatever you are interested in. Actually get an active manager just to identify the companies that are in that universe that are going to be winners.”

Taking comfort from historical performance data

Mr Khalaf is also concerned about the relative infancy of ETFs in the UK and, consequently, the lack of performance data available on them.

Without a track record to consult, he believes that investors are left in the uncomfortable position of being forced to put their faith in products that have yet to carve out a credible reputation.

“Passive works with plain vanilla indices,” he says. “FTSE 100 growth or the FTSE All-Share gives you broad exposure to the UK market.

"Once you start going into this more contrived, what is called smart beta area, I think you are really putting more and more faith into the product providers to create a product which is going to deliver good returns. 

"And the problem is they are not doing that in an active way. They are doing it mechanically, and I’m just not sure that that is a good model. I wouldn’t want to say definitively before there was performance data on these kind of things for a reasonable period of time.”

Sure things don’t exist

Perhaps one of the biggest challenges facing this investment strategy, both across the active and passive space, is establishing whether the chosen theme is actually sustainable. 

Providers generally dedicate a lot of resources to researching the validity of megatrends that interest their clients. But while that may sound comforting, it’s worth remembering that history is littered with cases of seemingly sure things becoming overnight fads. Classic examples include the Dutch tulip craze, smokeless cigarettes and the dot-com bubble.