A thematic exchange-traded fund (ETF) is a fund that allows you to invest in a certain topic, such as climate change or artificial intelligence. The ETF then invests in firms that are expected to gain from the trend.
Are themed exchange-traded funds (ETFs) safe?
Investing in thematic ETFs entails greater risk and, perhaps, greater rewards than investing in the larger ETF market. Investors should be mindful of the risks associated with investing in these specialty ETFs, but if done correctly, thematic ETFs can give exceptional returns.
What is the total number of thematic ETFs?
The Thematic ETF Report for Q3 2021 has been released by the Global X research team. The report summarizes Global X’s disruptive theme classification system and the thematic ETFs that track them. It also examines new launches and closures, changes in assets under management (AUM), and fund flows at the industry level for themed investment ETFs.
Thematic ETFs accounted for 2.0 percent of the $6.6 trillion in AUM in the US ETF industry at the end of Q3 2021. This is a tad lower than the 2.2 percent recorded at the end of the second quarter of 2021.
Taking a closer look, thematic ETF AUM declined to $133.7 billion this quarter, down 7% from the all-time high of $143.2 billion reached at the end of Q2 2021. The decline in thematic assets contrasts with a 2 percent quarter-over-quarter (QoQ) growth in the wider US ETF industry.
Despite the drop in assets, thematic ETFs experienced positive net inflows of $2.9 billion during the quarter, with market activity of -$12.4 billion accounting for the overall AUM drop in Q3.
Thematic ETF AUM climbed 128 percent year over year to $58.6 billion at the end of Q3 2020.
With 26 new releases and one closure, there are now 198 thematic ETFs, up from 173 at the end of the previous quarter.
People & Demographics-related topics witnessed the biggest drop in AUM (-$5.0 billion), followed by Disruptive Technology-related themes (-$4.3 billion) and Physical Environment-related themes (-$0.1 billion).
Healthcare Innovation continues to be AUM’s most popular theme, followed by Cloud Computing and CleanTech.
The research team at Global X developed a thematic classification system that provides a standardized framework for finding disruptive themes and categorizing the thematic ETF market. We’ve seen a lot of different definitions of thematic investing in the media and in the financial sector, which leads to misunderstanding about which ETFs are thematic and which topics they track. We think that by introducing this classification system, we will be able to provide more clarity about disruptive themes and the ETFs that are associated with them.
The practice of identifying powerful disruptive macro-level trends and the underlying investments that stand to benefit from the materialization of those trends, according to Global X, is known as thematic investing.
Thematic investment is a long-term, growth-oriented strategy that invests in related concepts and is often unconstrained geographically or by traditional sector/industry classifications. It also has a poor correlation to other growth strategies.
ESG, values-based, or policy-driven strategies are not included in thematic investing unless they reflect a disruptive structural trend (e.g. climate change). Furthermore, funds that follow standard sector or industry classifications or are primarily designed to obtain exposure to cyclical patterns (e.g. currencies, values, inflation) are not considered themed. Finally, non-thematic asset groups such as listed infrastructure, MLPs, and common commodities are not included.
The thematic classification system of Global X is divided into four layers: 1) Categories; 2) Mega-Themes; 3) Themes; and 4) Sub-Themes, with each tier narrowing in focus successively.
The biggest layer, ‘Categories,’ represents three key disruption drivers: exponential technological breakthroughs (Disruptive Technology), shifting consumer behaviors and demographics (People & Demographics), and the changing physical landscape (People & Demographics) (Physical Environment).
‘Mega-Themes,’ which are one layer down, serve as a foundation for several transformative forces that are making significant changes in a common area. Mega-Themes are, in theory, a collection of more narrowly tailored Themes. Big Data is a Mega-Theme that includes Machine/Deep Learning, Cybersecurity, Quantum Computing, and Cloud/Edge Computing, for example.
We define ‘Themes’ as the precise areas of transformational disruption that are propelling technology forward, changing consumer preferences, or having an impact on the environment farther down. In the present classification system, there are 40 topics.
Sub-themes are more specialized regions, such as specific uses of themes or upstream factors that propel themes onward.
Thematic exchange-traded funds (ETFs) can invest in a single category, mega-theme, theme, or sub-theme. Our categorization technique examines the methodology, holdings, and stated objectives of an ETF to determine the best fit. Thematic classification is evaluated every three months to consider new categories, mega-themes, themes, and sub-themes. A new ETF’s classification is examined as soon as it launches or alters its strategy.
We find that there is a growing need for a consistent framework to track these themes and the investment vehicles that provide access to them in an uncharted era of new technologies disrupting existing paradigms, demographics reshaping the needs of the world’s population, shifting consumer behaviors forcing changes to existing business models, and dramatic changes in our physical environment.
What is the definition of theme strategy?
Thematic investing is a strategy that focuses on long-term trends rather than specific firms or sectors, allowing investors to take advantage of fundamental, one-time upheavals that can transform an entire industry.
What exactly is a theme stock?
Thematic investing aims to find equities that benefit from a specific trend, such as drones, solar energy, or cloud computing. Some companies within a theme may be young, resulting in a portfolio that is heavily weighted toward riskier small-cap growth stocks.
What is the definition of a themed portfolio?
Thematic Portfolios are a type of long-term investment that allows you to put money into things that you believe have the potential to change the world. They’re designed to provide you the most exposure to promising long-term trends while staying within your risk tolerance. Thematic Portfolios are made up of exchange-traded funds (ETFs) and balance assets that are grouped around distinct promising themes (non-thematic instruments). You can find out more information here.
First Trust Cloud Computing ETF (SKYY)
This index ETF invests in firms that profit from cloud computing, a market segment that provides on-demand services such as data storage and computational power over the internet. As of Oct. 20, 2021, the ETF has a 28 percent annualized return over the previous five years. Each stock’s holding size is limited to 4.5 percent of the fund’s total assets.
ARK Innovation ETF (ARKK)
This actively managed ETF invests in disruptive innovation, which the fund manager defines as new goods or services that have the potential to drastically alter how the world works. Stocks in genomics, energy and automation technology, shared infrastructure and services, and fintech innovators are among the investments. The stock returned roughly 44 percent annually to investors for the five years ending Oct. 20, 2021.
Global X Robotics & Artificial Intelligence ETF (BOTZ)
This index ETF invests in firms that stand to benefit from the rise of robotics and artificial intelligence, including industrial robots, automation, and self-driving vehicles. The Indxx Global Robotics & Artificial Intelligence Index is followed by the fund. Over the past five years, the ETF has returned around 20% annually, as of Oct. 20, 2021.
First Trust NASDAQ Cybersecurity ETF (CIBR)
The Nasdaq CTA Cybersecurity Index is tracked by this fund, which has a ticker symbol that shows what it invests in cybersecurity firms. Its cybersecurity businesses are mostly in the technology and industrial sectors, and include those that secure networks, computers, and mobile devices. Over the last five years, the fund had returned around 23% annually, as of Oct. 20, 2021.
iShares Global Clean Energy ETF (ICLN)
This fund, sponsored by BlackRock, one of the world’s largest investment firms, follows an index of global clean energy companies, including those associated with solar, wind, and other renewable energy sources. Over the previous five years, the fund has returned 23 percent annually as of Oct. 20, 2021.
Vestas Wind Systems, Enphase Energy, Orsted, Plug Power, and Consolidated Edison are the top five holdings.
ARK Genomic Revolution ETF (ARKG)
Medical technology is one of the most fascinating fields, and this actively managed fund is searching for firms that are working on gene editing, stem cells, and targeted medicines to extend and improve human life through technical and scientific advancements. Over the previous five years, the fund has returned around 35% annually to investors as of Oct. 20, 2021.
Teladoc Health, Exact Sciences, Pacific Biosciences of California, Fate Therapeutics, and Vertex Pharmaceuticals are the top five holdings.
Amplify Transformational Data Sharing ETF (BLOK)
This actively managed ETF invests in firms that create and use blockchain technologies, the technology that underpins cryptocurrencies like Bitcoin. The fund is new, having been established in January 2018, and as a result, it is modest. The fund had returned more than 31% yearly as of Oct. 20, 2021, including 111 percent in the previous year.
Marathon Digital Holdings, Hut 8 Mining, MicroStrategy, Coinbase, and PayPal are the top five holdings.
What is a thematic investment fund?
Thematic funds are a form of equity mutual fund that invests in firms across several sectors that are related to a well-defined topic. A fund with a farming/agricultural theme, for example, might invest in equities stocks from the cars, chemicals, fertilizers, and core agriculture sectors.
What is the definition of thematic analysis?
Thematic analysis is a method for studying qualitative data that comprises examining a data set for repeating patterns, understanding them, and reporting them (Braun and Clarke 2006). It is a way for describing data, but it also involves interpretation in the selection of codes and the creation of themes.
What is the best investment class?
Best in class (ESG) investing refers to the active selection of only those firms that meet a set ranking hurdle created by environmental, social, and governance criteria for the composition of portfolios. Companies are often graded on a number of factors. The final score will be determined by how the criteria are weighted, which can differ per sector. Companies that meet a predetermined criterion, such as the top 30%, top 50%, or another threshold within each sector, will be considered qualified. A best-in-class ESG portfolio is made up of companies that pass both an ESG and a financial screening process, which is usually carried out by distinct teams of analysts using their own data and methodologies. After that, the portfolio manager assembles the portfolio from the names that make it past the ESG and financial filters. Because the process adapts well to near-passive investment approaches that need low tracking error to one of the traditional wide market indexes, best in class portfolios have become a norm in SRI product offerings. This strategy, on the other hand, has the issue of producing SRI portfolios that aren’t all that different from traditional portfolios. Some responsible investors are looking into building passive or near-passive portfolios based on custom-designed ESG or sustainability-designed indexes as a response to this. If such portfolios achieve their clients’ goals at a lower cost than best-in-class ESG active portfolios, they could be a viable and even preferable option.