Diversify your Core with Thematic and Active ETFs
The growth of the ETF industry continued over 2020, reaching a record of $7.6 trillion in AUM driven by the broad shift to lower cost and more liquid investment products, the digitalization of the investment industry, changing distribution models and the emergence of a new generation of investors whose expectations and preferences have been shaped by an on-demand world.
When the benefits of ETFs are discussed the focus is usually on the advantages gained by the investor – low-cost market access, easy diversification and tradability. But ETFs have also created significant opportunities for modern asset managers to alter their distribution paradigm and leverage the disruptive distribution technology of ETFs to grow their businesses, attract new investor bases and offer their investment ideas in the wrapper that many investors prefer.
As new issuers seek to compete for their slice of the growing ETF pie, a raft of new funds is breaking away from broad index tracking approaches, and providing exposure to novel investment themes, emerging economic and social trends and alpha-generating active strategies. This new generation of Thematic and Active ETFs are shaking up the ETF industry and changing the game for investors.
We will look at which of these new products are gaining most traction, the role they have to play in a diversified portfolio and how investors can assess them.
Thematic ETFs: story-driven and future-facing
Thematic ETFs cover a wide range of different approaches that share one common quality – they transcend traditional sector and country definitions to deliver exposure to emerging industries, social themes, niche ideas or long-term demographic megatrends. Investors can now buy ETFs that target broad global megatrends like Ageing Populations (AGED), emerging technologies and industries like Cloud Computing (SKYY), Medical Cannabis (CBDX) and Ecommerce (EMQQ) or niche themes like pet care (PAWZ), space (UFO) or even video gaming and e-sports (ESPO).
Story-driven and future-facing, these ETFs are a marketer’s dream and are far more relatable and accessible to retail investors than traditional investment products.
Speak to the average person about yield-curves, asset allocation or sector correlations and their eyes glaze over and they fall off their chairs. Speak to them about technology, social issues, hobbies and interests and their faces light up.
This highlights the key appeal of Thematic ETFs – they make investing interesting and fun – allowing investors to buy into the things that they care about or enabling an advisor to tailor a portfolio to the interests of the client. As such, Thematic ETFs are an increasingly common satellite allocation for investors who want to spice up their portfolio with something a bit different.
Many thematic ETFs seek to target high-growth potential emerging trends and businesses and investing in them comes with an implicit bet that the theme will outperform the overall markets over time.