THEMATIC ETFs TO PROLIFERATE IN 2017

Expect to see more novelty investment ideas in 2017 as the flurry of new thematic exchange-traded funds is likely to continue as ETF providers seek to stand out in a bevy of product launches.

Thematic ETFs are narrowly based vehicles that group investments based on a central idea. One of the best-known and biggest thematic ETFs is the PureFunds ISE Cyber Security ETF (HACK), which has $748 million in assets under management (AUM). Another thematic ETF that has gained traction is State Street Global’s SPDR SSGA Gender Diversity Index (SHE), which invests in companies that have women in leadership positions. SHE launched in March 2016 and already has $273 million in AUM.

Ben Johnson, director of global ETF research at Morningstar, agrees that 2017 will see more of these types of ETFs.

“Absolutely. We’ll continue to see proliferation of thematic ETFs,” he said.

But that doesn’t mean investors will bite.

“I would also be so bold as to predict that the vast majority of investors will not take notice. These will be fun to joke about around the water cooler, but you’ll see very few serious investment dollars put into these funds,” he added.

A big part of that reason is that some of these funds are too narrow, Johnson says. That goes against the countervailing trend of what investors seem to want, which is very diversified, very-low-cost, very tax-efficient, very liquid ETFs.

Broad Diversification

“[Thematic ETFs] really don’t have any broad-based use case for a broad spectrum of investors, who more often than not are really trying to diversify as broadly as possible, keep costs as low as possible, and moving ever further away from trying to pick individual stocks or individual themes or time markets,” he said.

For every HACK and SHE, other thematic ETFs have quickly made their way to the graveyard, such as the CrowdInvest Wisdom ETF (WIZE). It rebalanced monthly based on users voting on what stocks to include in the index, but only lasted five months.

Thematic ETFs are a novelty at this point, Johnson says. Launching any new ETFs to fill an outstanding need is tough now.

“The marginal utility of your average newly launched ETF is awfully low at this point,” he noted.

Given the record number of ETFs that have been launched in the past few years, it’s hard for ETF providers to stand out in a crowd, which makes launching these thematic ETFs a way to get noticed.

“We’re years beyond the S&P 500, the Total US Stock Index, the Total US Bond Index and the more meaningful, more useful segments of each of the above,” Johnson said. “But there’s so little white space that it’s only natural that enterprising firms trying to make a name for themselves in this space are forced to hit a button on a random idea generator and put whatever comes out of that machine into an ETF and list it on the NYSE.”

Find your next ETF

Reset All