INVESTING EXPLAINED: What you need to know about thematic ETFs – exchange-traded funds designed to take advantage of the general ‘mega-theme’ shift
In this series, we break the jargon and explain a popular investing term or topic. Here it is: thematic ETFs.
What are they?
ETF stands for Exchange Traded Funds, supposedly because investors can buy or sell at any time. Other funds trade only once per day.
A thematic ETF is designed to benefit from a change in a broad “mega-theme” such as big data, fintech, mobility or robotics.
They could also choose a narrower theme. Within the robotics mega-theme, for example, are topics such as artificial intelligence (AI) and drones.
No matter which mega-theme you choose, there’s a wide variety of backgrounds available, from medical cannabis to pet care.
What is it about ? : A thematic ETF is designed to benefit from a change in a broad “mega-theme” such as big data, fintech, mobility or robotics
How do they work?
Managers do not pick individual stocks. Instead, they take a passive approach, following a specially constructed cue.
Companies are weighted, in some cases, by market value, so larger companies make up a larger portion of the index. But the largest weights can also be assigned to companies that derive the most revenue from the theme.
Does AI have a role?
Yes. For example, JP Morgan Asset Management has its own system – Themebot – which helps its managers cover 13,000 companies around the world, narrowing potential opportunities.
Themebot has been used for its Climate Change Solutions ETF, which was launched last year in Britain.
What about fees?
ETFs have much lower annual management fees than active funds where managers pick stocks. Charges can be 0.05% compared to 0.50% to 1% for an active fund. But thematic ETFs are more expensive.
How big are the risks?
There is a risk of over-concentration in one area – sometimes an area that has also been over-hyped. As a result, investors can buy at the top. Since most ETFs are technology-focused, they have been affected by rising interest rates, although some are starting to rebound.
What are the well-known funds?
Around $79 billion is invested worldwide in this type of ETF. But the best known – and most controversial – is the $7.3 billion ARK Innovation ETF managed by Cathie Wood, one of America’s most watched managers.
In 2022, the fund’s value fell by two-thirds due to its stakes in TV streaming company Roku and Tesla, sparking a firestorm of criticism over Wood’s strategy. But the fund is up 36% in the past month. Wall Street is eager to see what happens next.
You interest me…
Thematic ETFs can be a way to invest in something you’re passionate about, like clean energy or electric vehicles.
But the advice is that these funds should only form a small part of a portfolio, unless you have deep pockets.
