from the Cloud
to outer space
whatever your investment thesis, there’s likely a thematic ETF for that.
Or is there?
Innovative exchange-traded funds with clever marketing and cute tickers grab lots of media attention, but command a relatively small share of the number of funds and total assets invested, according to a new analysis. Even so, the development of a system to classify such funds in order to analyze them speaks to their growing appeal.
The report comes from Global X, a thematic ETF provider – MarketWatch profiled its “Conscious Capitalism” fund
in August – in order to classify the “disruptive themes and the thematic ETFs that track them,” and follow industry trends in this area.
One of the most useful sections of the Global X report might be its attempt to define “thematic investing,” before even quantifying it. The company defines thematic investing as a “long term, growth-oriented strategy, that is typically unconstrained geographically or by traditional sector/industry classifications, has low correlation to other growth strategies, and invests in relatable concepts.”
What does that mean?
“There must be high conviction that the theme will materialize and have a meaningful impact on segments of the economy or markets,” Global X explains.
In addition, there must be a way for investors to access that theme, which means there have to be publicly-traded companies with that theme whose stock can be bundled into a fund. Ideally, that’s a broad group of companies, all of which have high liquidity and attribute a substantial portion of their business operations, including revenues, assets, research and development to the theme.
That may sound obvious, but some themes may struggle to find a broad enough basket of securities that meet its criteria. In the case of Nuveen’s ESG High Yield Corporate Bond ETF
that constraint makes the fund a riskier bet because it’s less diversified. And for the Procure Space ETF
, a “space economy” fund, it simply means the fund has a lot of generalist stocks that help support outer space exploration from a very terrestrial perspective: ground equipment manufacturing, satellite-based telecommunications, and so on.
Finally, “a theme must be expected to express itself over a medium to long-term time horizon,” Global X says, meaning five years or more. That allows enough time for the theme, not lucky market timing, to be proven out.
Global X points out that thematic ETFs hold only $25.1 billion, out of $4 trillion in the overall ETF space. And they represent only 119 funds out of about 2,300.
The company’s classification system includes three categories: Disruptive Technology, People & Demographics, and Physical Environment, which contain 10 “mega-themes” including Big Data, Digital Content, FinTech, Connectivity, Robotics, New Consumer, Health, Climate Change, Infrastructure Development, and Mobility. Within the mega-themes sit about three dozen smaller themes ranging from Millennials to Blockchain to 3D Printing.
In the third quarter of 2019, five thematic ETFs launched, Global X noted. Four of them invest in cannabis, and one is focused on cloud computing. Meanwhile, funds in Global X’s Climate Change category had the biggest growth in assets during the quarter.