Pedro Palandrani, Global X ETFs
When conducted properly, thematic investing can help position a portfolio for an era of new technologies disrupting existing paradigms, demographics and shifting consumer behaviours that will force changes to existing business models, Pedro Palandrani, research analyst at Global X ETFs, told FSA.
“It is a forward-looking investment approach that seeks to embrace the changes we anticipate happening in the world,” he said.
An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way a regular stock can.
Global X, which is owned by Mirae Asset Global Investments, defines thematic investing as the process of identifying powerful disruptive macro-level trends and the underlying investments that stand to benefit from the materialisation of those trends.
By nature, thematic investing is 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.
Thematic ETFs are gaining momentum across the world. At the end of the third quarter of 2021, thematic ETFs represented 2% of the US ETF industry’s $6.6tr total AUM, according to Global X. On a year-over-year basis, thematic ETF AUM increased 128% to $133.7bn from $58.6bn at the end of the third quarter of 2020. And there are now 198 thematic ETFs.
ETF is also gaining popularity in Greater China, while thematic index-linked funds lead the surge in demand across the region.
As the powerful macro-level themes begin to accelerate, a new set of companies are likely to rise to the top of each sector of Asia Pacific economies. Rather than waiting for traditional sector funds to cycle out of the old guard of companies in favour of new leaders, investors can potentially pre-empt these changes by targeting sector disruptors, Palandrani said.
“Thematic ETFs that invest in companies that are well-positioned to be a step ahead of the status quo in developing revolutionary technologies or catering to a rising consumer base [will benefit], ” he added.
Thematic investing is typically a satellite position or an equity sleeve in a growth-oriented portfolio. If people consider a traditional 60/40 (60% stocks, 40% bonds) portfolio, Palandrani believes that 10% of the equity portion could be replaced by thematic strategies. In other words, it replaces a portion of core or growth equity exposure, keeping asset allocation generally the same.
Global X ETFs are focussed on the opportunities for companies stemming from several themes, including social media, video games, e-commerce, and blockchain.
Advancements in robotics & AI are making machines smarter and more capable than ever before, allowing robots to take on increasingly sophisticated tasks for faster and more accurate production. Declining chip costs and improving connectivity allows for virtually any object to connect to internet-enabled networks, allowing it to collect or receive big data, in a massive expansion of the internet of things, supported by the scalable infrastructure of cloud computing.
These are just a handful of disruptive technology-related themes well positioned to capitalize on the changes that Global X ETFs likely to see in the future, according to Palandrani.