Thematic ETFs Unlocked
Thematics have revolutionised the way fund selectors think about ETFs. Gone are the days of only tracking broad market-cap-weighted benchmarks such as the S&P 500 or MSCI World through ETFs. Now, investors have the opportunity to access alpha through a variety of ETFs, however, it is thematic ETFs that have resonated the most with investors in recent years. The ability to access exposure to structural, long-term megatrends is what has driven this uptake alongside the promise of diversification and the attractive returns on offer.?
As a result, issuers have been launching thematic ETFs at a breakneck pace since 2019 with investors able to access a whole variety of themes including blockchain, clean energy, space and artificial intelligence, to name a few. Highlighting this, there are now 155 thematic ETFs listed on the London Stock Exchange with €29.2bn assets under management (AUM), according to data from ETFbook .??
However, not all thematic ETFs are created equally, meaning fund selectors need to be extremely cautious when analysing this segment of the market. The index design and rules an ETF follows is crucial to understanding the overall success of the product and is a key driver of returns. Because the process of designing a thematic index is very active by nature, this can lead to huge return dispersions between ETFs offering exposure to the same megatrend. Taking the semiconductor UCITS ETF universe as an example, there is a 10.5 percentage point (ppt) dispersion between the best and worst performing ETF so far this year, as at 13 June.?
How to look under the bonnet of a thematic ETF is a key theme throughout this report as highlighted by BNP Paribas Wealth Management 's Stephan Kemper in Chapter 3 as well as 法国兴业银行 ’s Sebastien Lemaire in Chapter 1 who warns of the risks of large ETF ownership on underlying stocks, an issue particularly prevalent in thematic ETFs due to their larger exposure to small cap securities.?
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Elsewhere, in a world where thematic ETFs tend to invest in growthy tech names, ETF Stream ’s Theo Andrew assesses five thematic ETFs that could perform well as investors prepare for a period of structurally higher inflation in Chapter 1 while ETF Stream ’s Jamie Gordon analyses the latest megatrend to be wrapped in ETF format – defence – in Chapter 3.?
Finally, a thank you to our partners in this report – 晨星 Indexes, MSCI Inc. and Qontigo – for sharing their insights. Overall, we hope this report provides a snapshot into the thematic ETF landscape and acts as a tool for any professional investor looking to stay ahead of the curve when considering the current universe of megatrends.?
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