What are Thematic ETFs?

Thematic ETFs are a solution of choice for thematic investing. In a single transaction, investors can capture the investment opportunity of one or more themes emerging from trends and megatrends.

Our world is evolving and reshaping around long-term structural changes called Megatrends affecting social, demographic, environmental, economic and governmental global balance. These inescapable global forces manifest through the emergence of new trends disrupting our daily lives.

Combining a top-down and a bottom-up approach across the entire universe of Thematic ETFs, Trackinsight identified five Megatrends.

The Five Megatrends of Thematic ETFs

• Technology Innovation such as the rise of Robotics, Automation and Artificial Intelligence;
• Rising Urbanization or the transformation of cities into megacities, the so-called Smart Cities, built around demographic and environmental issues;
• Environmental Changes resulting from global warming which opens the door to Alternative Energies to reduce climate risks;
• Next Gen Economies referring to the awakening of emerging countries as new consumers and key economic and geopolitical players;          
• Demographic Shift such as the birth of the Silver Economy resulting from populations ageing across the globe and therefore representing a new category of consumers with specific needs and expectations.

Thematic investing captures the investment opportunities arising from megatrends in a portfolio, thematic ETFs being one of the preferred implementation solutions. Although there is no consensus definition, we can outline their main characteristics.

Thematic ETF main characteristics

• An alpha generation narrative;
• A long-term investment horizon;
• A global approach where traditional geographical sectoral and style boundaries are erased, giving way to strong conviction asset allocation resulting into potential biases;
• The stock selection process also integrates growth valuations and innovation parameters;
• The weighting scheme often removes the size effect to favour small and medium-sized market capitalizations, such as equal weights.

As a very heterogenous universe, in terms of composition and performance, no two thematic ETFs are alike.

The Thematic ETF classification system: Megatrends, Trends and Themes

Trackinsight has developed an open-source classification system offering a clear structure to the wide range of thematic ETFs. The universe is categorized according to a proprietary three-tiered methodology which maps each ETF against 5 Megatrends, 12 Trends and 68 Themes. This methodology provides a transparent framework for ETF research, comparison and analysis. As some themes can support more than one megatrend, they can be identified through more than one path.

As an illustration, the Battery Value-Chain theme captures the investment opportunity offered by the Alternative Energy trend which could emerge from any of the three following megatrends: Technology Innovation, Rising Urbanization or Environmental Changes.

Figure 1.0: Battery Value Chain Theme Illustration

With this new classification standard and dedicated portal, Trackinsight cuts through the noise of the fast-growing universe of Thematic ETFs to guide investors in their thematic investing journey.

Want to know more? Take a look at the Thematic ETFs available to buy in your region.