In 2022, Morningstar noted a significant number of new ETF launches were thematic, indicating a shift toward more specialised strategies such as sustainability as investors moved away from broad-based benchmark environmental, social and governance exposures.
Total assets under management in the ETF sector across the US and Europe was estimated at approximately $10tn (£8tn) at the end of November 2023. Within this, thematic ETFs form a niche but rapidly growing segment.
The growth in AUM and the number of thematic ETFs launched each year highlight their increasing relevance in the global investment landscape.
| 10 largest thematic ETFs by AUM (as at 15/03/2024) | |
|---|---|
ETF name | AUM ($) |
ISHARES AUTOMATION & ROBOTICS UCITS ETF USD (ACC) | 3,635,484,642.80 |
ISHARES GLOBAL CLEAN ENERGY UCITS ETF USD (DIST) | 3,212,036,696.46 |
XTRACKERS ARTIFICIAL INTELLIGENCE & BIG DATA UCITS ETF 1C | 2,731,366,459.28 |
L&G CYBER SECURITY UCITS ETF | 2,657,395,389.04 |
ISHARES GLOBAL WATER UCITS ETF USD (DIST) | 2,221,538,060.03 |
AMUNDI MSCI WATER ESG SCREENED UCITS ETF DIST | 1,616,913,799.10 |
ISHARES GLOBAL INFRASTRUCTURE UCITS ETF USD (DIST) | 1,479,644,579.56 |
ISHARES DIGITAL SECURITY UCITS ETF | 1,433,611,025.28 |
ISHARES HEALTHCARE INNOVATION UCITS ETF USD (ACC) | 1,135,126,700.00 |
AMUNDI MSCI ROBOTICS & AI ESG SCREENED UCITS ETF ACC | 1,055,829,184.13 |
Interestingly, sustainability themes were among the largest fund flows over the past 10 years, including health, sustainable cities and clean tech.
| 10 largest thematic ETFs by fund flows (as at 15/03/2024) | |
|---|---|
ETF name | Inflows of past 10 years (%) |
ISHARES GLOBAL CLEAN ENERGY UCITS ETF USD (DIST) | 4,929,912,863.79 |
XTRACKERS ARTIFICIAL INTELLIGENCE & BIG DATA UCITS ETF 1C | 2,155,903,454.22 |
ISHARES AUTOMATION & ROBOTICS UCITS ETF USD (ACC) | 1,859,437,916.10 |
L&G CYBER SECURITY UCITS ETF | 1,754,233,847.53 |
ISHARES GLOBAL WATER UCITS ETF USD (DIST) | 1,200,622,659.65 |
ISHARES HEALTHCARE INNOVATION UCITS ETF USD (ACC) | 1,174,115,350.00 |
AMUNDI MSCI NEW ENERGY ESG SCREENED UCITS ETF DIST | 1,170,827,384.98 |
ISHARES GLOBAL INFRASTRUCTURE UCITS ETF USD (DIST) | 1,030,573,955.83 |
ISHARES DIGITAL SECURITY UCITS ETF | 1,020,841,304.10 |
AMUNDI MSCI WATER ESG SCREENED UCITS ETF DIST | 851,485,696.73 |
| Source: ETF Book | |
What is the difference between a trend/'fad' versus thematic investing?
Trend or fad investing is a strategy that aims to capitalise on rising sales and profits from a short-lived phenomenon, just like a fad is in fashion. In fact, “fade” is what coined the term “fad”.
While trend/fad investing can be profitable for investors, the challenge is in correctly timing one’s entry and exit to maximise profits. Stay in too long, and investors risks seeing their profits shrink, if not evaporate, as the trend fades away.
Thematic investing focuses on evolving structural changes, meaning the duration of a theme is typically measured over multiple years. Initially, a structural change may have a modest impact, but over time as those changes unpack themselves, the impact becomes increasingly pronounced.
Evolving technology and changing psychographics as well as demographics play a role in the velocity of that structural change.
Can investment themes overlap?
It is not uncommon for several themes to be complementary, due in part to evolving technology, products and services. Indeed, research from McKinsey notes: “The most attractive opportunities are found when multiple themes converge and reinforce one another.”
The combination of multiple tailwinds offers greater velocity to a company’s business compared, which should highlight resilient stocks and sectors that are useful from a portfolio construction perspective and risk mitigation perspective.
For advisers, the narrative-like nature of themes, combined with real-world experience that serve as proof points for investors, are advantageous in conveying this style of investing to clients.
Portfolio construction
Incorporating thematic ETFs into a portfolio enhances diversification and potential for alpha generation. They offer exposure to innovative sectors and emerging industries not typically covered by traditional indices.
Allocating a portion of a portfolio to thematic ETFs can complement core holdings, providing balance while leveraging growth opportunities in evolving industries.
However, it is crucial to assess the alignment of these themes with long-term investment goals and understand the risks associated with specific sectors.
