Thematic exchange traded funds—comprising everything from robotics to millennial-oriented stocks—represent one of the fastest growing segments of the ETF industry.
As you might expect, thematic ETF providers gave a largely upbeat prognosis of the space at the Inside ETFs conference in Hollywood, Fla. this week, while also stressing the need for advisors to exercise due diligence in choosing funds.
“Thematic ETFs provide an investment to increase diversification and have themes that investors want for growth or social values,” said Michael Arone, chief investment strategist for State Street Global Advisors. “They tend to be related to lifestyle, demographics and technology.”
In general, he looks at investment portfolios as having three aims: growth, income and managing risk. Thematic ETFs fit in the growth category for total return and can offer diversification if they’re uncorrelated to stocks and bonds.
Given the strong gains in stocks and credit investments over the past few years, it will be more difficult to generate attractive returns with a traditional 60 percent stocks/40 percent bond portfolio going forward, Arone said. “Thematic investments will help you get growth returns.”
The funds can enhance positions that your clients already have, he said. For example, if you believe synchronized global economic growth will persist, you might invest in the industrial sector—an infrastructure ETF. In the technology industry, you might opt for robotics, artificial intelligence or 3D printing.
Arone identified three budding themes for thematic ETFs:
- Intelligent infrastructure, including power grid and clean water investments;
- Smart mobility, including autonomous vehicles and drones;
- The future of security, including military and cybersecurity.
Travis Briggs, CEO of Robo Global, said the most successful thematic ETFs are disruptive, like some of those mentioned above. But advisors must look carefully at the names in the fund. “What does the portfolio look like without the rosy picture” of the theme?
It’s also important to make sure the index behind the ETF indeed matches the theme, said Sam Masucci, CEO of ETF Managers Group. “Select the right manager and make sure they rebalance, that the index doesn’t drift away from the theme. Can the ETF go to $500 million without losing the theme?”
Indexes will frequently evolve over time, he and the others said. That’s because many of the companies in the ETFs are young. Some may get acquired, some may disappear and new companies may be added. “Over time a portfolio grows to capture that,” Masucci said. “Thematic ETFs require more research by advisors and more communication with providers.”