BlackRock’s 16 exchange-traded fund launches in the U.S. during 2022 have focused almost exclusively on fixed income strategies or equity themes.
Jay Jacobs, the issuer’s U.S. head of thematics and active equity ETFs, joined the Exchange Traded Fridays podcast to discuss the overall thematic ETF category and how his firm chooses to address it with its funds.
The firm’s Megatrend ETF suite currently includes 23 products, five of which debuted this year, making it a fairly fast-growing category within a lineup of more than 390 ETFs. Jacobs describes the protocol for establishing a theme at BlackRock as “a very rigorous research-driven process.”
“True, long-term structural themes should be somewhat rare,” he noted. “There shouldn't be hundreds of them in the world—there are probably dozens of them in the world at any given time. And they're constantly evolving.”
A Shifting Focus
In recent years, the very nature of investor interest in themes has evolved, according to Jacobs. He noted that while for several years the spotlight was on breakthrough or disruptive technologies, recent increases in interest rates and the shift from growth to a value focus have pushed thematic investors away from technology-related exposures.
“That doesn't mean thematic investing has fallen out of favor. Actually, we've seen investors have stuck around and there's been a very strong resilience among investors in the thematic space,” Jacobs said. “Increasingly, they're finding themes that are not necessarily tech themes. We've seen very strong inflows into infrastructure-related themes this year.”
Indeed, year to date, the iShares U.S. Infrastructure ETF (IFRA) has pulled in more than $885 million, while the iShares Global Infrastructure ETF (IGF) has added $248 million, according to data on ETF.com.
Legislation a Factor
Jacobs cited the passage in November 2021 of the Infrastructure Investment and Jobs Act as a key driver of interest in those funds as well as two ESG-related ETFs in the Megatrends suite.
“The iShares Global Clean Energy ETF (ICLN) and the iShares Self-Driving EV and Tech ETF (IDRV) have been big beneficiaries as well, [because] this bill is really trying to accelerate adoption of those two themes,” he said, noting that the recently passed Inflation Reduction Act has also been a boost to those funds, as it directed $370 billion in incentives to related industries.
The legislation helped to tip the scales toward both industries, Jacobs said.
“We see this as really setting off clean energy and electric vehicles on a new, steeper trajectory going forward, which we're very excited about,” he added. “We see it as one of the most powerful disruptive opportunities out there.”
Specific catalysts such as legislation can accelerate a theme, according to Jacobs, and cited the pandemic as a key driver in the genomics industry due to how it raised the profile of mRNA-based vaccines. During 2020 and 2021, when the pandemic was still raging, the iShares Genomics Immunology and Healthcare ETF (IDNA), pulled in $283 million.
Identifying a Megatrend
The Megatrend ETFs are focused on “disruptive forces” associated with five pillars: urbanization; emerging global wealth; demographics; climate change; and resource scarcity.
“I like to think about it as the three P's: It's the power of the theme, it's the purity of the theme and it's the pathway going forward,” Jacobs said of the process for determining how a theme will be addressed.
For example, prioritizing thematic purity means a theme with few pure-play stocks may require a custom index or an active manager to properly capture the space, while “pathway” refers to how long it will take for a theme to see true growth.
“We really want to look for themes that have longevity but that also are going to hit that inflection point relatively soon—we don't want to be waiting 100 years for a theme to materialize,” he added. “Ideally, I would say that inflection point starts to hit around three to five years.”
At a time when artificial intelligence, especially natural language processing, is being incorporated into thematic ETF methodologies more and more, Jacobs said BlackRock primarily relies on revenue sources to identify themes and classify securities.
“First we start with the theme, then we look at what the subthemes are and then we map those to a classification system for really granular revenue level detail, to understand which companies are really leading in those subsegments of a theme,” he said.
Year to date, the 23 funds in BlackRock’s Megatrend ETF suite have seen net flows of roughly $630 million. In aggregate, they represent $16 billion in assets.
Contact Heather Bell at [email protected]