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Thematic ETFs on the rise

Thematic ETFs

The growth of the ETF sector is being driven by the rise of thematic funds tapping into global trends as investors demand access to these movements.

Thematic exchange-traded funds (ETF) are increasingly being used in place of individual investments into different market segments and more theme-based ETFs are likely to be launched into a sector already seeing strong growth, according to a specialist manager.

ETF Securities head of distribution Kanish Chugh said the current size of the Australian market was more than 220 funds, with $96 billion in funds under management, and it was expected to grow further during 2021 with more funds still in the development pipeline.

Chugh said a conservative estimate for the growth of the ETF sector was around 20 per cent each year and part of that would be thematic funds that focused on areas of growth compared with sector ETFs that focused on certain types of companies.

“What will be quite important is that we now have choices, so if I look at thematic ETFs, there is an e-sports fund, cybersecurity, robotics and automation, battery technology, climate change and so on, and there is a choice for an investor beyond just saying ‘I want a thematic product’,” he said.

“If you talk about this year being the year of the thematics, then retail investing is really going to drive the ETF market to the next level,” he added, pointing to the firm’s battery technology fund.

“Look at our ACDC ETF. I mentioned it received about $45 million in inflows just last year, but now we are hitting inflows, for this year to date, of $82 million of net inflows – and that’s just in the last two-and-a-half months.”

Chugh acknowledged investors coming to the ETF market are looking for exposure to a range of current themes and while they could buy stocks such as Tesla or CSL for exposure to battery technology or biotechnology, the volatility of individual shares was less attractive.

“Essentially what you may find is with Tesla the stock is up 20 per cent one week and down 20 per cent the other week,” he explaind.

“I looked at CSL at the start of last week and when I ran the comparative figures, that stock was down 15 per cent compared with our biotech fund, which was up 40 per cent over the 12-month period.”

He said new investors were trading shares, but were also seeking the less risky, diversified exposure offered by ETFs and were replacing outlying sector investments with thematic investments.

“Investors are still using ETFs as satellite investments, but using them in place of sectors. They are looking at robotics or biotech themes in the same way as they view sectors and are approaching investments in these themes in the same way, so they may buy a financials or resources or healthcare ETF in the way they used to buy into those sectors,” he revealed.

However, Chugh warned investors of the need to be cautious about what made an investment trend and thematic ETF.

“Essentially, you need to have government support for the thematic to be a long-term trend and need to have a demographic push behind it,” he advised.

“If you don’t have those two, then that thematic is a fad and leads to working-from-home ETFs or COVID ETFs, which have been launched in some overseas markets.”

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