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10 hot investing trends: How to pick the best thematic ETF

Wooden blocks spelling out ETF on a background of paper filled with graphs. A man removing money from a wallet.
Thematic ETFs have been growing in popularity with investors who are turning their focus to megatrends (Source: Getty)

This year marks 20 years since the first exchange-traded fund (ETF) listed on the ASX and in that time the investment product has exploded in popularity and seen a number of changes.

For one, the people who use ETFs to build their investment portfolios have changed significantly. What used to be a tool for institutional investors was steadily adopted by consumers and now young Aussies have jumped on board in a big way.

That’s because an ETF is a basket of stocks that follow a specific asset, index or sector and can be traded just like a share on the stock market.

There are around 200 ETFs listed on the ASX for investors that cover a vast range of investment opportunities.


And this is where thematic ETFs have really come into play, Kanish Chugh, head of distribution at ETF Securities, told Yahoo Finance.

“We see this younger generation coming into investing who want to invest in ETFs versus investing in a single stock,” Chugh said.

“They want to have exposure to things that are going to impact their lives in the future and focus on these long term disruptors.”

In the six months to June 2021, thematic ETF funds under management grew more than 35 per cent.

Thematic ETFs are exchange-traded funds that focus on a specific theme as opposed to an industry or broader index.

This allows an investor to have a much more targeted exposure, and invest in themes that they see becoming megatrends.

“You can actually build an entire portfolio that aligns to your views and values, because you've now got that choice,” Chugh said.

Ilan Israelstam, BetaShares head of strategy and marketing told Yahoo Finance that megatrends are those that are expected to benefit from economic changes, disruptive technologies, demographic shifts, and changes in consumer behaviour.

“These may be trends we see happening around us every day, for example, the growing demand for cybersecurity as our lives shift online, or solutions aimed at combating climate change,” Israelstam said.

“Thematic ETFs typically aim to track an index providing exposure to a portfolio of companies that have the potential to benefit if the theme plays out. And, in order to give investors ‘true to label’ exposure to the theme these funds are typically sector and country agnostic.”

A graph showing the value of thematic ETFs on the ASX over time.
(Source: ETF Securities)

How to choose a thematic ETF

The first step in choosing a thematic ETF is deciding which megatrend you believe in. For example, one person may be more inclined to invest in artificial intelligence (AI) while another person may want to go with renewable energy.

Chugh said it’s best to choose something that you believe is going to be a true disruptor in the world for decades to come.

“These aren't trading tools in the sense that you buy today to sell tomorrow. You don't have to do the research on a specific stock but you should do the research on the ETF to make sure it is representative of the trend you want,” he said.

“Once you’ve done that it’s just about deciding how much of an allocation you want in your portfolio.”

BetaShares believes thematic exposures as part of a well-diversified portfolio can provide an exciting potential for returns, and exposure to markets previously difficult, or impossible, to access.

“Most importantly of all, investors are able to gain access to a theme they have strong conviction in, without the difficulty and risk of having to pick a specific stock,” Israelstam said.

Investors may use thematic ETFs with the objective of gaining investment exposure to a specific and focused theme.

What are megatrends?

The rise of thematic ETFs are actually relatively new in Australia, but they provide investors with easy accessibility to megatrends.

A megatrend is a long-term structural shift that transforms economies. They can be distinguished from cycles in that the changes they create are enduring, ETF Securities outlined in a research paper.

An example from previous decades include the creation of cars, which ended the horse- drawn carriage industry.

ETF Securities believes there are four main categories to group megatrends by: Transformative Technology, Society & Lifestyle, Health & Wellness, and Environment & Resources.

BetaShares has a long list of thematic ETFs listed on the ASX ranging from climate change to cloud computing and cyber security.

Thematic ETFs on the ASX

According to Morningstar the top 10 ASX listed thematic ETFs that have returned the most to investors this year are:

  1. ETFS Battery Tech and Lithium ETF (ASX: ACDC)


  3. BetaShares Asia Technology Tigers ETF (ASX: ASIA)

  4. ETFS Morningstar Global Technology ETF (ASX: TECH)

  5. BetaShare Global Robotics and Artificial Intelligence ETF (ASX: RBTZ)

  6. ETFS Robo Global Robotics And Automation ETF (ASX: ROBO)

  7. BetaShares Global Sustainability Leaders ETF (ASX: ETHI)

  8. Betashares Nasdaq 100 ETF (ASX: NDQ)

  9. Betashares Global Cybersecurity ETF (ASX: HACK)

  10. ETFS S&P Biotech ETF (ASX: CURE)

In terms of popularity, BetaShares said there are a number of trends that have been seeing more investment than others.

These include Cyber Security, Cloud Computing, Climate Change and Robotics and Artificial Intelligence.

So, whilst these investments may not have seen the most returns yet, investors are banking on them being the megatrends of the future.

Pros and cons of thematic ETFs

According to ETF Securities, thematic ETFs can be used in several ways, depending on the outcomes you’re targeting.

These are:

  1. Access to long term growth trends, potentially offering outperformance

  2. An educational journey and the chance to learn

  3. More flexibility in defining sectors

  4. Hedges against disruption, and its impact on portfolios

  5. More targeted exposure than broad market indexes like the Nasdaq or S&P

However, investors sometimes criticise thematic ETFs for buying expensive “glamour stocks”, ETF Securities said.

While an investor may agree with a megatrend that the thematic ETF is targeting, sometimes they may not agree with the stocks included.

An example of this might be Tesla - some investors believe Tesla is overpriced and so don’t think it has a lot of growth potential when included in an electric vehicles ETF, ETF Securities said.

Two charts showing the performance of Tesla against the S&P 500.
(Source: ETF Securities)

What to watch out for when choosing an ETF

When choosing a thematic ETF it is important to check exactly what companies it invests in as it may not be what you think from the ASX code.

“The name of an ETF is just the name. You want to read the documentation that the ETF provider has to make sure it invests in line with the theme you want,” Chugh said.

ETF Securities for example has an ETF which invests in robotics, automation and artificial intelligence (ASX: ROBO), but it’s not a technology investment.

“People will think robotics and automation means things like Apple, Google and Amazon, but that’s not the case,” Chugh said.

The ETF is actually invested in things that follow the megatrend of the adoption of robotics like Intuitive Surgical - an American company that develops, manufactures, and markets robotic products designed to assist in surgeries.

The other thing to keep in mind is fees - just like with any other investment you want to make sure you’re comfortable with the fees you will be charged.

Make sure to read through the documentation that is provided to fully understand what product you’re investing in and how much it will cost.

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