Alchemy Of Thematic ETFs

August 26, 2019

John DiCiaccioFirst-Mover Status
Brandon Thomas, chief investment officer for Envestnet, says a well-designed and well-managed thematic ETF with first-mover status may create a moat for the little-guy issuers, preventing others from launching a rival product: “Any follow-on ETF that may try to enter the space is going to have a hard time gaining assets, particularly when the theme is a little bit more niche-y.”

The Amplify Online Retail ETF (IBUY) may be an example of that. Magoon says he launched his company on the back of IBUY in 2016, and the fund had $279 million in AUM as of press time.

Because it was a brand-new company without the marketing budget of a big firm, IBUY was slow to gather investor attention and AUM. Plus, it was launched during a time when people were taking an overall negative view of retail, Magoon explains. But he says what’s helped is that people now see a difference between online and brick-and-mortar shopping, and that the ETF’s performance is strong.

“The way you surface, generally, to core ETF users who usually aren’t the most thematic friendly, is you have performance that stands out,” he explained. “Marketing and media help, but there’s nothing that sells like performance.”

IBUY’s annualized three-year performance is up 25% as of the beginning of August, versus -6.5% for the SPDR S&P Retail ETF (XRT) and 14% for the SPDR S&P 500 ETF Trust (SPY).

Graveyard Of Ill-Fated ETFs
Many things can doom an ETF, explains Envestnet’s Thomas. High costs can be a detriment, as most thematic ETFs cost much more than a plain vanilla S&P 500 fund. Costs come into sharp focus, he notes, since thematic ETFs are usually a very small portion of an overall asset allocation.

What kind of distribution capabilities an issuer has to promote, market and sell the ETF can make a difference, and without it, some ETFs may not take off. With the growth of asset allocation portfolios of ETFs in robo platforms, it can make a difference if one thematic ETF is included over another.

“If you’ve got a very large provider of strategist portfolios, and they have a particular theme they want to present,” Thomas explained, “that gets incorporated into the model and it gets widespread distribution.”

Forces outside of an issuer’s control can also hurt a thematic ETF, he adds, such as if another issuer launches a competing ETF with more desirable traits for investors, which can lead to a fund losing AUM.

Tell A Good Story
Jacobs says some themes have all the right characteristics, but telling the story about the theme and why it’s important can be challenging. That can lead to a fund languishing before investors notice it. Not all themes are sexy technology funds.

He used the Global X Longevity Thematic ETF (LNGR) as an example. The fund launched in 2016, has $21 million in AUM and focuses on companies serving an aging population.

“There are stories that come out about longevity, but I don’t think it’s a story that really has captured people’s attention in the way that robotics or fintech has …,” Jacobs notes. “When you have a decline in populations around the world, that’s really when it starts to become a social issue that people are talking about every day.

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