Thematic ETFs Continue Gaining Assets. Clients Want in on the Action.

Seasoned veterans of the exchange traded funds industry know the following pair of tidbits to be true and frequently vocalized.

First, it's often said that “all the good ideas are taken.” Second, there was a time when thematic ETFs were, at best, afterthoughts. At worst, those products were assailed as “too much of a good thing” and points of mockery.

Like any growth industry, ETFs evolved – the industry still is – and opinions toward thematic ETFs aren't just warming. The shift is on towards outright embracing, indicating that advisors servicing risk-tolerant clients, younger clients or both should get familiar with the pros and cons of thematic funds. Data confirm as much.

“As of the end of Q1 2021, thematic ETFs assets under management (AUM) made up 2.2% of the US ETF industry’s $5.9 trillion total AUM,” says Global X Pedro Palandrani. “This is up from 1.9% AUM share at the end of Q4 2020, continuing the segments’ rapid growth when compared to the US ETF industry as a whole.”

Growth Can't Be Ignored

As Palandrani points out, thematic ETFs had a combined $133.1 billion in AUM at the end of the first quarter, up from $104.1 billion at the end of 2020. Obviously, the thematic is operating from a lower starting point than the broader industry, but that quarter-over-quarter growth equals 28% compared to 7% for the industry at large.

Several things are clear. First, thematic ETFs are growing. Second, the current environment is conducive to allocations toward some of these products. Third, the AUM trajectory of thematic ETFs indicates some, if not a lot of retail investors are gravitating toward these instruments on their own. 

All of those are potential inroads for advisors in having the thematic conversation with clients. After all, the universe of these funds is rapidly expanding – 163 at last count – and some emerging growth concepts are more conducive to clients' long-term success than others.

Advisors engaging clients regarding thematic funds is important for another reason: The balancing act between near-term utility and long-term validity. For example, it's easy to get excited about infrastructure investing today and that could be the case well into the back half of 2021, but the political element within this theme doesn't always bear fruit for investors. 

Conversely, themes such as cloud computing, cybersecurity and healthcare innovation have long runways for growth and upside without political volatility. This is relevant to advisors because flows to thematic ETFs are increasingly diversified.

“Disruptive Technology-related themes saw the largest absolute gain in AUM ($18.0B), followed by those related to People & Demographics ($6.1B) and Physical Infrastructure ($4.9B),” notes Palandrani. “At a theme-level, Healthcare Innovation remains the largest theme by AUM, followed by the CleanTech and Cloud Computing.”

Adding Value

Another area advisors can add value is helping clients properly understand what constitutes thematic investing. Some may think a basic sector fund or an industry ETF, such as aerospace or software, checks the thematic box.

That's not the case. Nor do environmental, social and governance (ESG) and values-based strategies qualify as thematic, though many clients may think these products do.

“By nature, thematic investing is a long term, growth-oriented strategy, that is typically unconstrained geographically or by traditional sector/industry classifications, has low correlation to other growth strategies, and invests in relatable concepts,” according to Palandrani.

By providing a proper framework for thematic investing, advisors can bring more value to the table while proving to clients they're hip to emerging growth opportunities, not just bland beta products.

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