At an industry virtual happy hour recently, an intriguing idea came up: Thematic investing is the realm of entrepreneurial thinking, whereas traditional sector investing is a construct of index providers, and ill-fitted for today’s economy.
Not my idea, for sure. But clever! And it sparked a really interesting debate I’ve come across before when trying to make sense of segments in the ETF space.
For example: the idea that Visa and Mastercard are technology companies but financials, too; the idea that Facebook and Netflix are seen as tech by many investors, but classified as communication services by the Global Industry Classification Standard (GICS); the idea that Amazon is, well, a little bit of just about everything, but pegged only into the consumer discretionary sector.
This conversation seems to center on the “technologization” of so many parts of our economy. On the surface, one of the main issues is the cross-pollination of technology into so many other sectors.
In its simplest form, thematic investing is helping us address the massive disruption technology has caused on businesses across industries—a disruption that often challenges our sector view of the world, and falls outside the confines of our traditional low-cost beta sector allocation.
The question is, are today’s themes really our new and improved sectors?
There’s great research and quant work done on this that’s certainly worth digging into. But the happy-hour chat brought to mind the lineup of thematic ETFs from Global X, a firm that’s put a lot of work into developing this space, and offers a great example of the potential that themes have to disrupt traditional sector investing.
The Global X Cloud Computing ETF (CLOU), for example, is a technology sector ETF. The fund’s focus is on cloud computing, as in software as a service, platforms, data storage and so on. Maybe it’s a niche within technology, but the flip side is, what line of business—in any sector—doesn’t rely on cloud computing today? Can you really separate the two?
If you go a step further into this thematic versus traditional sector conversation, past the obvious technology implication on all things, you could argue that thematic ETFs are allowing us to invest in sectors as defined by how we live our day-to-day lives.
For example, look at the Global X Health & Wellness Thematic ETF (BFIT). This ETF could be considered a “health care” fund for those who view health as a holistic approach involving many things beyond pharmaceuticals and doctors.
BFIT invests in companies that make money from the business of good physical health. The approach here is to capture trends within a changing health care landscape, so the fund invests in companies involved with nutrition, weight loss, even fitness equipment.
If this were a traditional sector ETF, BFIT would probably be closer to a consumer discretionary fund than anything resembling health. Top holdings here are Lululemon, Herbalife and Planet Fitness. But the story is compelling if you believe health care is more than drugs and hospitals.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
Perhaps one the cleverest examples of capturing the challenge traditional sector investing faces in an evolving economy is the Global X Internet of Things ETF (SNSR).
SNSR is a hybrid of sectors, mixing consumer discretionary, health, tech and energy in a portfolio that, if it were a single sector ETF, it would have to be a “lifestyle sector” ETF.
SNSR offers access to companies that enable all things to be network connected—think wearable tech, home automation, smart locks, smart energy control, smart devices, connected automotive tech and so on.
Hurdles & Possibilities
It’s hard to imagine a day when traditional sectors and the Sector SPDRs vacate their dominance and their liquidity empire. Chances are, not in this lifetime. If for no other reason, simply because in the world of ETFs, liquidity is key, and achieving that kind of liquidity is almost unimaginable in the realm of thematic ETFs.
Today theme investing remains more of a satellite idea, complementing a core anchored in the tried-and-true sector and asset allocation.
And no doubt, thematic ETFs sometimes do seem gimmicky, often perceived as fads or marketing ploys without a long-standing role in a portfolio. Sometimes they are just that.
Just about every year, we have one or two thematic ETFs capture everyone’s imagination and become the talk of the town, chased by headlines and retail money looking for a short-term investing opportunity. These hot-flash-in-the-pan funds fizzle out just as fast as they sizzled, perpetuating the view that thematic investing is plagued by noise.
But it’s fun to think about the possibility of doing things differently. This conversation about themes offering a different—maybe better—mousetrap than traditional sectors for a world, an economy, companies that are more and more interconnected is really interesting.
Thematic investing is compelling because themes tell interesting stories about the way we live and the way we can invest accordingly. Successful thematic ETFs do this well—tell a good story.
Whether themes will eventually disrupt traditional sector investing and redesign what a core equity allocation looks like, who knows. But it’s a compelling storyline, and who doesn’t like that?
Contact Cinthia Murphy at [email protected]