Thematic ETFs head for the mainstream

The value of assets traded through thematic ETFs – stock funds that allow investors to make targeted bets on specific trends such as AI or the environment – could reach $300bn within five years, according to a recent survey. Dismissed as a gimmick just a few years ago, these specialist funds are proving particularly attractive to retail and younger investors, and are likely to take market share from almost everywhere including smart-beta, sector and active mutual funds in the near future. Their combined value currently stands at around $170bn, so for the survey’s predictions to come true, they would need to grow at a CAGR of approximately 12% between now and 2026.

younginvestorThe survey was carried out by custodian and fund administrator Brown Brothers Harriman (BBH), who found that 80% of professional investors plan to increase their allocation to thematic ETFs over the next twelve months. They are being increasingly joined by a new breed of independent investor whose ranks have swelled during the past 12 months with so many people either furloughed or working from home and with time on their hands. Other popular investment themes include IT, robotics and healthcare technology.

Investors are believed to be attracted to thematic ETFs due to their adaptability which enables the funds to invest in innovative industries and technologies as well as smaller companies that traditional GICS (Global Industry Classification Standard) sectors cannot touch. They also appear to be able to retain assets during downturns – during the two weeks to 5 March 2021, despite a drop in global equity markets, thematic ETFs saw net redemptions of just $700m, representing less than 1% of fund assets, according to the ETFGI, a specialist  research and consultancy firm.

“Thematic ETFs have taken in more money over the past three years than all other sector ETFs combined,” said Eric Balchunas, Senior ETF Analyst at Bloomberg Intelligence. “The recent selloff showed their durability with minimal outflows. At $170bn they already exceed the assets of any single sector and are more than double the size of any outside technology.”