In the United States – a country strongly identified with technological innovation – it is an innovation ETF that leads thematic investing. Laraib Shahid looks at popular themes in American ETFs.
Since the start of the Covid-19 pandemic, thematic ETFs have seen “dramatic growth”, according to Morningstar. At the end of August 2022, $120 billion was invested in thematic ETFs in the US.
At the global level, thematic ETFs accounted for over $141 billion in assets under management (AuM), with approximately a quarter of these assets in Ucits-regulated funds, according to Bloomberg (June 30, 2022).
Further, Trackinsight’s 2022 ETF survey showed that 300 new thematic ETFs were launched in 2021 globally.
Thematic ETFs are a relatively new concept but are capturing greater attention owing to the macro trends that drive the underlying investment thesis. Thematic investing refers to forward-looking, long-term investment strategies that aim to invest in macro changes that are shaping the world. Technology and the environment are two of the biggest.
Top three thematic ETFs in the US
ARK Innovation ETF is the biggest thematic ETF in the US, with $7,975 million in AuM, according to August 2022 figures from ETFGI, an ETF consultancy.
The fund tracks the performance of companies involved in developing new technologies and services, including in sectors such as scientific research and DNA technology, industrial innovation in energy, automation and manufacturing, shared technology infrastructures, and fintech services.
The second largest thematic ETF is the FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR US), with total AuM of $7,235 million. GUNR tracks an index of global companies that operate, manage or produce natural resources in energy, agriculture, metals, timber or water.
The third place is taken up by the iShares Global Clean Energy ETF (ICLN US), with $5,623 million AuM as of August 2022. This ETF invests in global clean energy companies involved in extracting energy from biofuels, ethanol, geothermal, hydroelectric, solar and wind.
“We see particular opportunities in companies driving innovation across clean energy, resource efficiency, sustainable consumption, the circular economy and water sustainability.”
The megatrends that underpin these ETFs are generally far-reaching technological, environmental and demographic trends that shift how people live and work.
Six of the top 20 thematic ETFs in the US focus on the environment and sustainability, and between them, have a total of $15.288 billion in AuM.
The world is confronting a climate emergency, and global warming is causing the earth’s glaciers to melt faster than they should. Pollution, wildfires, hurricanes and floods have become regular and more ravaging. Investors in ETFs related to the environment are no doubt partly motivated by saving future generations from the wrath of global warming and catastrophic environmental consequences.
Economy and finance are essential facets in achieving a sustainable future. COP27, the 2022 United Nations Climate Change Conference to be held in Egypt in November, notes that the “importance of adequacy and predictability of climate finance is key to achieving the goals of the Paris Agreement”.
The urgency to protect the environment and future generations from disastrous climatic events has led to massive awareness among the world population. People are more discreet about spending on sustainable products than ever before.
Compelling opportunities
The first thematic ETF to be launched was the iShares North American Natural Resources ETF in 2001. ETFs will forever be in competition with fund managers that offer active investment strategies, where stock picking is considered superior to benchmark picking. Thematic investing has long since applied to active managers, too.
Luke Barrs, head of client portfolio management, fundamental equity, Emea, at Goldman Sachs Asset Management, says: “In our role as active managers, we see particular opportunities in companies driving innovation across clean energy, resource efficiency, sustainable consumption, the circular economy and water sustainability.
“We believe that the shared ambition of governments, corporates and consumers means that companies exposed to these themes provide a compelling long-term investment opportunity.”
Within the area of environment, social and governance (ESG) investing, environment is the most popular theme within thematic ETFs in the US, and investors are increasingly aiming to invest in climate-friendly funds, said Rohan Reddy, director of research at Global X ETFs, an ETF provider based in New York.
More and more private investment companies are specialising in climate finance and sustainability. The reasons vary from image-saving to earth-saving.
According to the 2022 Trackinsight Global ETF survey, nearly 40% of investors are interested in investing in thematic ETFs targeting environmental changes.
Climate-focused thematic funds in the US invest in a wide range of opportunities, including energy infrastructure and technology, water conservation, carbon-zero automobiles and alternative energy resources, including solar and uranium.
Technology and innovation
As the world advances technologically and increasingly digitalises, technology is driving exponential progress in the tech sector and far beyond. According to Statista, more than 75 billion devices are expected to be connected to the internet by 2025, up from the current 35 billion. Public and private business are increasingly running their operations online.
Computers have replaced paper to store essential data and information. The need to protect a business’s data online has become ever more crucial and cyber security is benefiting from the rise of other disruptive technologies.
“The growth of the digital economy creates new entry points for cybercriminals. More spending on cyber security will be needed to prevent malicious attacks,” says Pedro Palandrani, director of research at Global X ETFs.
“America’s outdated infrastructure is in dire need of a 21st-century overhaul. deteriorating roads, waterways and seaports are liabilities to the country’s economic future.”
First Trust NASDAQ CEA Cybersecurity ETF in the US has $5,283 million in AuM, as of August 2022, taking the fourth spot in the US’s top 20 thematic ETFs.
It is notable here that seven out of the top 20 thematic ETFs in terms of AuM are technology-based and invest in several areas of technology, from cyber to climate-related technology, and from medical to automobiles.
Advances in science and medical technology form another area of interest for thematic ETFs. The biggest thematic ETF in the US, Ark Innovation, tracks the advanced biotechnology industry.
America’s outdated infrastructure
Four of the top 20 thematic funds in the US are investing in infrastructure-related businesses.
“America’s outdated infrastructure is in dire need of a 21st-century overhaul – a C-grade from the American Society of Civil Engineers says as much. Deteriorating roads, waterways, and seaports are liabilities to the country’s economic future,” said Palandrani.
The current Biden administration encourages private capital to enter the infrastructure investing space. According to the latest report by global infrastructure provider IFM, private-public partnerships are reshaping the future of infrastructure investment.
The Infrastructure Investment and Jobs Act (IIJA) is already starting to drive funding to America’s “most important and chronically underfunded infrastructure projects”, says Alec Lucas, research analyst at Global X.
Companies in the construction, industrial transportation, products and equipment, and raw materials and composites needed for infrastructure development benefit from this theme. Investors tap into this opportunity as the need to maintain and improve infrastructure intensifies.
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