Thematic ETFs Take Root & Grow

August 23, 2018

[This article appears in our September 2018 issue of ETF Report.]

Theme investing breaks away from traditional portfolio-building strategies with an intuitive, top-down investment approach that resonates with advisors and their clients.

At its broadest definition, theme investing is a catchall term to describe an investment strategy based on an idea or market niche. A theme is usually associated with new socioeconomic trends or innovative factors that are not properly captured by traditional sector or industry classifications. Investors seeking to profit in this way veer from traditional regional, sector and size allocations, and aim for concentrated exposure to industries and companies benefiting directly or indirectly from their theses.

Theme investing’s popularity also stems from its easy-to-understand investment premise. For example, rising infrastructure spending and how an investor can profit from it is an intuitive and logical pitch for advisors to give their clients. Moreover, an investment theme is supported by a strong growth thesis. ETF issuers conscious of the demand for these products have launched several ETFs around prevalent themes.

Infrastructure
While there is no specific definition for infrastructure, people usually associate infrastructure with projects needed to sustain economic growth. Bullish infrastructure investors note the significant capital resources developing nations are deploying to create new roads, electric grids, water and sewage systems. At the same time, developed nations are upgrading their transportation networks and investing in new telecommunication and renewable energy services.

In today’s ETF market, there are 13 niche infrastructure ETFs. These funds  have an overweight exposure to the industrials and utility sectors as seen in Figures 1A and 1B, yet some funds also have significant exposure to basic materials and energy companies. The iShares Global Infrastructure ETF (IGF) is the biggest in the group, with $2.71 billion in assets under management (AUM); the fund takes a global approach and overweights utility companies in its portfolio.

Emerging Market Consumer
An economics-driven theme is the emerging market consumer, particularly in Asia, where rising incomes have increased the demand for discretionary goods as well as for access to modern financial markets, telecommunication networks and health care services.

 

 

Currently, four funds aim to provide exposure to this trend, with the Columbia Emerging Markets Consumer ETF (ECON) being the largest consumer ETF, with $581 million in AUM. ECON focuses on consumer goods and services companies, and has large exposure to China, South Africa and Brazil. Its main competitor is the WisdomTree Emerging Markets Consumer Growth Fund (EMCG). The Global X China Consumer ETF (CHIQ) and the Columbia India Consumer ETF (INCO) track China’s and India’s markets, respectively, with particular emphasis on local companies in both the consumer cyclicals and non-cyclicals sectors.

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