What are Thematic ETFs? Investing Explained

INVESTING EXPLAINED: What you need to know about Thematic ETFs – exchange-traded funds designed to benefit from shift in broad ‘mega-theme’

In this series, we bust the jargon and explain a popular investing term or theme. Here it’s : Thematic ETFs.

What are they?

ETF stands for exchange-traded fund, so-called because investors can buy or sell at any time. Other funds are traded just once a day.

A thematic ETF is designed to benefit from a shift in a broad ‘mega-theme’ such as big data, fintech, mobility or robotics.

They might also pick out a narrower theme. Within the mega-theme of robotics, for example, are themes such as artificial intelligence (AI) and drones.

Whatever mega-theme you pick, there is a huge variety of funds available, from medical cannabis to pet care.

What are they?: A thematic ETF is designed to benefit from a shift in a broad ‘mega-theme’ such as big data, fintech, mobility or robotics

How do they work?

Managers do not pick individual stocks. Instead, they take a passive approach, tracking a specially constructed index.

Companies are weighted, in some cases by market value, so larger firms make up more of the index. But the largest weightings may also be allocated to companies that make the most revenue from the theme.

Does AI have a role?

Yes. For example, JP Morgan Asset Management has its own system – Themebot – which helps its managers to cover 13,000 companies across the globe, thus narrowing down potential opportunities.

Themebot was used for its Climate Change Solutions ETF, which was launched last year in Britain.

What about charges?

ETFs have much lower annual management charges than active funds where managers pick the shares. The fee may be 0.05 per cent compared with 0.50 per cent to 1 per cent for an active fund. But thematic ETFs are more expensive.

How big are the risks?

There is the risk of over-concentration in one area – sometimes an area that has also been over-hyped. As a result, investors may be buying at the peak. Since most ETFs are focused on technology, they have been adversely affected by rising interest rates – although some are starting to revive.

What are the well-known funds?

About $79billion is invested worldwide in this type of ETF. But the most well-known – and most controversial – is the $7.3billion ARK Innovation ETF run by Cathie Wood, one of America’s most-watched managers.

In 2022, the fund’s value dropped by two-thirds due to its stakes in TV streaming firm Roku and Tesla, sparking a storm of criticism over Wood’s strategy. But the fund has risen by 36 per cent over the past month. Wall Street is agog to see what happens next.

You’ve got me interested…

Thematic ETFs can be a way to invest in something that you feel passionate about, such as clean energy or electric vehicles.

But the advice is that these funds should form only a small portion of a portfolio, unless you have deep pockets.

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