What are thematic ETFs

Thematic investing means picking an investment that you believe can deliver superior returns driven by strong trends or themes such as demographics, technological change or environmental issues.

Investors are then able to harness the massive advancements technology is making across all industries. Technological disruption often challenges our view of the world and transcends the confines of traditional investment allocations.

The importance of diversification and the ability to precisely capture the investment returns driven by disruptive technology has been one of the key driving forces behind the rise of thematic exchange-traded funds (ETFs) in recent years.

Standard and thematic ETFs: what is the difference?

For over fifty years, Modern Portfolio Theory has led investors everywhere to build regionally based portfolios, allocating larger weights to their home countries, and adding diversification through investments in other major markets around the world. “Standard ETFs” were born out of the fact that many active managers were struggling to outperform their benchmark indices, thus leaving the regional investors to believe they were better suited to lower costs and simply achieve benchmark returns.

Enter Thematic ETFs. Thematic ETFs invest in themes, regardless of sector, country or region. Thematic ETFs are designed to provide investors with pure exposure to a particular theme in a repeatable and cost-efficient way.

Some themes may even be so powerful that their momentum is often so distinct from global macroeconomic and market cycles that they march to their own drum. Investing in change can offer some degree of immunity to cyclical risk and shifting dynamics in global investment markets. In 2018 and 2020, for example, themes such as Internet-related, Cloud Computing, Cyber Security and Biotechnology businesses outperformed the broader markets. Discover more about the impact of disruptive technology here.

The Benefits of Thematic Investing Include:

Pure Exposure – A thematic portfolio gives investors targeted exposure to topics and trends that meet their personal views and aims.

Access – Thematic portfolios typically include companies that investors wouldn’t have any exposure to in mainstream portfolios. Unlike sector funds, they can include companies across any industry or sector that are driving or harnessing change within that theme.

Diversification – The ability to invest in many stocks from a theme rather than be left with the difficult decision of who the winners and losers will be years into the future as a theme plays out.

Resilience – Thematic funds have historically performed well in the face of market turbulence driven by the power of the theme rather than the direction and sentiment of the wider market.

Thematic ETFs have grown in popularity over the last three years, with their assets expanding by more than five times¹. As innovation and change sweeps through our society and investors hunt for different sources of growth to complement their core holdings, that growth is expected to continue.