Thematic ETFs May Redefine Sector Investing

June 15, 2016

Global X is breaking new ground with a quickly growing lineup of thematic ETFs the firm believes could redefine sector investing in the future. We’re talking about funds such as the Millennials Thematic ETF (MILN), the Longevity Thematic ETF (LNGR) and the S&P 500 Catholic Values ETF (CATH), to name a few.

CEO Bruno del Ama and Vice President/Head of Research Jay Jacobs tell us why Global X is making such a push into theme-based investing, and why themes are the new sectors. Global X today has 11 thematic ETFs, and a dozen or so more in registration. It's not often we see a blockbuster success in a very narrowly focused fund. Why such a push into themes?

Bruno del Ama: Contextually, we have, as of today, about $500 million in thematic ETFs, primarily between the Social Media ETF (SOCL | B-47) and five resource ETFs. Thematic investing is about capitalizing on future trends.

If you think about how people have traditionally invested—call it the Select Sector SPDR view of the world—they’ve long invested in sectors, but no one thinks of sectors as niche.

Why? Is it because it's sort of a broad theme? The reality is that a lot of people say they want to invest in technology, and they think of technology as a proxy for growth stocks. That was true a couple of decades ago. It really isn’t quite true today.

Today you’ll find social media companies and big data companies in a tech ETF. But you’ll also find, for example, personal computer companies—PCs—and that’s a very mature industry, very slow growth.

On the flip side, if you think about the health care sector, which tends to be much more defensive, anticyclical, you're going to have companies like biotech names that have a lot more of the technology-type characteristics of growth and innovation.

That’s where thematic investing comes in. We think about thematic as a way to capitalize on future trends, on where the world’s going. Thematic investing started as an institutional trend. Very recently, it's migrated to the private banking space.

So if you're a wealthy individual with a private banking account at Goldman Sachs or Merrill Lynch, UBS, Morgan Stanley, you have access to the research those shops have been building on thematic investing for their clients. And all of those shops, for example, have identified millennials as a theme they think their clients should be positioned for.

We're bringing themes like millennials, for example, to everyone, which we think isn’t niche at all. We think it’s actually a very broad category, much like a sector. It’s a very broad consumer category, but at a cross-sector sort of analysis. We’re positioning the portfolio to bet on what millennials are spending, and the ETF wrapper is a very good mechanism to democratize what until recently has been an institutional investment trend. Lee Kranefuss recently told me thematic ETFs are like trying to chase a hot stock or write a hit song. I'm guessing you completely disagree with that view, but the question is, how enduring are these themes?

Del Ama: It's very difficult for anybody to challenge Lee Kranefuss, because he's a brilliant man and he has a great perspective on our business. Now, I’ll tell you that I am friends with Kranefuss’ co-partner and co-chairman on his new investment vehicle, 55 Capital, Vinay Nair, and we've talked about our thematic ETFs and he likes them. But he and Lee would certainly make a distinction between a short-term one-hit theme, and a long-term investment theme. 

If you go through how they actually invest, they actually have a system that rotates across ETFs based on a number of signals. I’d argue the investment firm he's building is very much of the view that thematic investing is a great way to think about the world. Fair enough. Let’s talk about whether these themes are long-term trends. Are they appropriate for long-term investors?

Jay Jacobs: There are really three things we look for in a thematic trend before we have conviction about this being a potential ETF. First, is it highly likely that this trend will play out the way we expect it to?

If you think about the millennials ETF or the other two we launched recently—the Health & Wellness ETF (BFIT) and the Longevity ETF (LNGR)—they all fall in our people category. And one of the good things about people is that they’re actually fairly predictable if you're looking at things like consumer behaviors and demographics. It can happen slowly, but it can be very predictable.

Secondly, we look for is investability. Are there investments that are liquid enough that have high exposure to these themes? And the third thing we look for is the time frame. Because even if it's investable and it's highly likely to happen as we expect it to, if it's going to happen over a very short time frame, getting the timing right becomes a lot more important, and that reduces the likelihood of being able to generate returns from that thematic idea.


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