Thematic ETFs Struggle to Capture Financial Advisors’ Attention

Issuers of thematic ETFs can predictably make enthusiastic arguments for how and why investors benefit from concentrated exposure to everything from the global marijuana industry to Chinese internet companies.  

Financial advisors, meanwhile, as the largest users of exchange-traded funds for their clients, still generally view such targeted investing themes as not part of a serious long-term strategy. 

“I think too many people use them to speculate instead of for thoughtful portfolio construction,” said Paul Schatz, president of Heritage Capital. 

According to the etf.com database, there are more than 300 ETFs targeting a specific theme, with combined assets of around $125 billion, which is a tiny slice of the nearly $11 trillion total U.S.-listed ETF market. 

Yet ETF issuers continue to roll out new products by treating thematic strategies as flush with potential.  

One recent example is Tema, an new ETF issuer that entered the market in May with three thematic funds and this week launched two more. Tema’s total AUM is barely over $20 million, but the platform appears poised for bigger things. 

Granularity of Theme ETFs 

Tema’s newest launches, the Oncology ETF (CANC) and the Global Royalties ETF (ROYA), are perfect examples of how granular thematic strategies can get. 

“We believe they both have their investment merits and will benefit from risk management by seasoned investors,” said Tema founder and CEO Maurits Pot. 

“They offer structured exposure to difficultly accessible private assets, underlying commodities, and deliver equity-like returns with contractually supported income,” he added. 

While it would be difficult to dispute the ability of thematic funds to provide targeted exposure, the ongoing riddle lingers over the investor appetite. 

“I look at them as hot sauce to an overall portfolio that represents the meal,” said Bloomberg Intelligence ETF analyst Eric Balchunas. 

“One of the biggest value propositions they’re offering is exposure to things you don’t own,” he added. “Maybe you don’t need them, but if you have a core portfolio that’s cheap beta, sometimes it’s helpful to scratch your itch with a thematic strategy.” 

Experimenting With Theme ETFs 

Nate Geraci, president of The ETF Store, also places theme ETFs near the fringes of a diversified portfolio, but he finds some value in letting clients experiment with themes if it helps keep them focused on the overall strategy. 

“My experience is that thematic ETFs can be extremely effective behavioral tools for some investors,” he said. “Many investors have some semblance of a gambler inside of them or a particular passion around more granular areas of the market. I’ve found that a small allocation to thematic ETFs, say between 2%-5%, can be very effective in helping investors stick with the remaining 95% globally diversified, very boring portfolio.” 

At Sage Advisory, partner Komson Silapachai said they have occasionally used thematic ETFs in some model portfolios, but he believes the category is mostly about “trying to capture what is popular at the moment.” 

“Oftentimes they will be short lived, versus more traditional factors,” he said. “The other issue with thematics and why you’re not seeing wide adoption, is sometimes the theme is hard to define. If you’re trying to put these in a portfolio, it’s hard to find the risk profile and what can be expected over the long term.” 

Meanwhile, even if the funds aren’t yet flying off the shelves, the issuers are showing no signs of curbing their enthusiasm. 

“Many investors, particularly younger ones, are looking for ways to connect their investments to their personal interests, beliefs and values,” said Greg Friedman, head of ETF management and strategy at Fidelity Investments, which launched six thematic ETFs in June, bringing the fund company’s total to 31 thematic mutual funds and ETFs that combine for $7.6 billion in AUM. 

“It’s part of the evolution of the industry,” Friedman said. “From growth and value to sectors and factors, and now thematic investing.” 

Contact Jeff Benjamin at @[email protected]