In Focus: Passive Investing  

ETFs offer more than cheap beta

ETF investors want to be able to add all investment strategies and that has happened over the past five years, with many of the new ETFs being developed moving away from passive.

The rise of thematic ETFs

Thematic ETFs have been a major area of innovation. 

Lots of investment products can be intimidating and complicated for investors and talking about smart beta, value or growth investing does not help.

However, most people have an opinion on thematic investments as they are usually part of their everyday lives or interests. They include e-commerce, cloud technology and health care to name a few.

Thematics may not be suitable to replace the majority of someone’s core portfolio, but they can provide a nice 'sleeve' on top of the core to deliver some long-term growth and upside.

The great beauty of thematics is that you can excite your imagination.

Our current range includes space technology; medical cannabis; 5G infrastructure; energy infrastructure; e-commerce; solar power; clean energy; cryptocurrencies; online gaming; travel and airlines; software; ESG gold miners; decarbonisers; cleaner living; cloud technology; and health care innovation.

We and our competitors are planning many more and innovation is key. 

Other providers offer exciting themes such as semiconductors; healthy food; cybersecurity; robotics; battery technology; alternative transport; big data; social media; and blockchain technology.

This is not an exhaustive list but is a great indicator of the wave of product innovation coming to the ETF market.

It is important investors know the risks when investing in ETFs. A strong portfolio is diversified and that will be dominated by core beta, including equities and bonds.

More esoteric investments like thematics should be a smaller part of the portfolio – commonly termed 'satellite' exposures.

As these are growing trends, they can be volatile, although a good thematic is usually a long-term trend, so investors need to consider that when investing. 

ETFs: the next frontier

Active ETFs are probably the next frontier for the European ETF market, as what happens in the US tends to be followed here. Typically, the US is three to five years ahead in AUM growth and product innovation.

If this is the case, then it is only a matter of time before active ETFs become commonplace in Europe.

Over the past two years active ETFs have gone from nowhere to being the main battleground for providers in the US and we expect that to happen in the UK and Europe. 

The US Securities and Exchange Commission changed their rules around two years ago to allow active ETFs to be issued en masse.

That enabled active managers to provide minimal holdings disclosure and made them comfortable about issuing ETFs. Until that change was made they had to give full daily disclosure of holdings.