3 thematic ETFs to bet on the technology innovation megatrend

One of the biggest "megatrends" in investing these days is technology innovation. As seen with the recent release of ChatGPT, disruptive technologies have the potential to revolutionize our way of living. 

For risk-seeking investors looking for the latest and most exciting opportunities, investing in technology innovation could be a good long-term growth strategy. The megatrend encompasses 8 trends, with notable ones including digital infrastructure & connectivity, robotics & automation, metaverse, and cybersecurity. 

That being said, identifying individual innovation companies can be difficult. Investors need to carefully scrutinize each company's filings to determine if their strategy, mission, services, and products truly qualify as innovative.

I think using a thematic ETF focused on technology innovation can be a great hands-off alternative. With thematic innovation ETFs, investors can leverage the expertise of financial and technology professionals to screen for innovation as opposed to doing it themselves.

Let's take a look at three of the coolest thematic innovation ETFs on the market today, dealing with robotics and automation, the metaverse, and cybersecurity. 

L&G ROBO Global Robotics and Automation UCITS ETF (ROBO)

ROBO is a UCITs ETF which is intended for European investors. Currently, the ETF tracks the ROBO Global Robotics and Automation UCITS Index, which holds the shares of companies actively engaged in robotic and automation activities.

ROBO distinguishes its holdings as either:

1. Robotic and automation technology, which includes sensing, processing, computing and artificial intelligence, actuation, and integration.
2. Robotic applications, which includes manufacturing and industrial automation, 3D printing, logistics automation, food and agriculture, surveillance and security, energy, healthcare and consumer products.

The ETF also weights its holdings by how much a company's revenue is derived from robotics and automation. The formula works as:

1. 40% of the ETF is comprised of equally weighted companies that derive most of their revenues from robotics and automation.
2. 60% of the ETF is comprised of equally weighted companies that derive only a distinct portion of their revenues from robotics and automation.

Most of the ETF is held in U.S. stocks at 46%, with Japan coming in second at 20%. The fund performed poorly in 2022 with a -29.30% loss but was a standout in 2020 and 2021 with a 26.64% and 35.13% return respectively. ROBO charges a 0.80% expense ratio.

What's notable about ROBO is its "global ESG policy," which permits the index provider to exclude stocks from ROBO's holdings if "there is an unacceptable risk that the company contributes to or is responsible for serious human rights violations, severe environmental damage, and other particularly serious violations of fundamental ethical norms, including the production of weapons that violate fundamental humanitarian principles through their normal use." The ESG policy also screens for direct fossil fuel exposure, and is intended to align with the 10 principles of the UN Global Compact.

U.S. investors can also access ROBO via its USD listed equivalent, the ROBO Global Robotics & Automation ETF (ROBO). The expense ratio for the USD version is higher at 0.95%.

First Trust Nasdaq Cybersecurity ETF (CIBR)

U.S. investors aware of the increasing prevalence of cybersecurity threats can bet on the industry's continued growth via CIBR, which tracks the Nasdaq CTA Cybersecurity Index. This index holds stocks involved in the building, implementation, and management of cybersecurity products and services. 

To be eligible for the index, a company must be classified as a cybersecurity company by the Consumer Technology Association (CTA), have a market capitalization of $500 million, a minimum three-month average daily dollar trading volume of $1 million, and a minimum free float of 20%.

The ETF's underlying index is evaluated on a semi-annual basis and rebalanced on a quarterly basis. Currently, the largest holding in CIBR is Cisco Systems at 6.25%, followed by Broadcom at 5.81%, Infosys at 6.13%, and Palo Alto Networks at 5.65%.

CIBR is a very concentrated play on a specific industry in the technology sector and is best suited to high-risk growth investors. The fund does have a 4-star Morningstar rating in its category. Currently, CIBR costs an expense ratio of 0.60%. 

European and U.K. investors can also gain access to CIBR via its UCITS version FBCR. This ETF charges the same expense ratio and has the same holdings but is an accumulating ETF. As a result, distributions are automatically reinvested and reflected in the ETF's NAV periodically.

Global X Metaverse ETF (VR)

Mark Zuckerberg's metaverse ambitions may have flopped so far, but the overall metaverse industry is far from dead. According to Global X, the global Metaverse market is expected to grow by over 50% from 2021 to 2022 to reach $100 billion, with some forecasts of $1.5 trillion by 2029.

So, what does investing in the metaverse entail? According to Global X and their VR ETF, this means investing in companies that develop hardware and software that enable digital realities, 3-D simulations, creator economies, digital payments, and non-fungible tokens.

It also encompasses the more traditional technology companies that support these processes: semiconductor manufacturers, cloud computing providers, and wireless infrastructure that supports the development and consumption of digital media.

Both of these considerations come together in VR, which tracks the Global X Metaverse Index. Current top holdings in this ETF include Nexon, Tencent, NVIDIA, Meta Platforms, and Nintendo. The ETF costs an expense ratio of 0.50% and is great for taxable accounts due to its low yield. 

Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.