The rise of thematic ETFs in investing
Exchange-traded funds (ETFs) have been around since the early 1990s, but it's only in the last few years that thematic ETFs have gained popularity among investors. Thematic ETFs are exchange-traded funds that invest in specific themes or trends, such as clean energy, robotics, or cannabis. These ETFs provide investors with exposure to industries that are growing rapidly or offer the potential for large profits, but they also come with their own risks.
The popularity of thematic ETFs can be attributed to several factors. Firstly, investors are increasingly interested in investing in companies that align with their values. This trend has been driven by the rise of socially responsible investing (SRI) and environmental, social, and governance (ESG) criteria. Thematic ETFs that invest in areas such as clean energy or healthcare innovation allow investors to align their investments with their values.
Secondly, the growth of technology has made investing in thematic ETFs more accessible. Investors can now easily trade ETFs using online trading platforms, and thematic ETFs can be bought and sold just like regular ETFs. This ease of access has helped to drive the popularity of thematic ETFs.
Thematic ETFs can also provide investors with diversification benefits. Because these ETFs invest in specific themes or trends, they can offer exposure to industries or sectors that investors may not otherwise be able to access. For example, an investor who wants exposure to the clean energy industry may not be able to invest directly in companies in that industry, but can do so through a thematic ETF.
However, there are some risks associated with thematic ETFs. Firstly, these ETFs are often more volatile than traditional ETFs because they invest in specific industries or themes. This means that they are more susceptible to downturns in those industries or themes. For example, a thematic ETF that invests in the cannabis industry may be more volatile than a traditional ETF that invests in broad-based indices.
Secondly, the growth of thematic ETFs has led to an increase in the number of ETFs on offer. This means that investors need to do their due diligence when selecting an ETF to invest in. They need to consider the ETF's investment strategy, management fees, and reputation.
Despite these risks, thematic ETFs continue to gain in popularity. According to data from ETFGI, global thematic ETF assets under management (AUM) grew from $71 billion at the end of 2015 to $236 billion at the end of 2020, representing a compound annual growth rate (CAGR) of 27.9%.
One of the most popular thematic ETFs is the ARK Innovation ETF (ARKK), which invests in companies that disrupt traditional industries with new technologies. The ETF has seen significant growth in its AUM, from $1.39 billion at the end of 2017 to $27.94 billion at the end of 2020. The ETF has delivered impressive returns, with an average annualized return of 38.60% for the three-year period ending December 31, 2020.
Another popular thematic ETF is the iShares Clean Energy ETF (ICLN), which invests in companies that produce renewable energy or facilitate the transition to a low carbon economy. The ETF has a CAGR of 25.4% since its inception in 2008 and had $4.8 billion in AUM at the end of 2020.
Thematic ETFs can provide investors with exposure to industries that are growing rapidly or offer high potential returns, but they also come with their own risks. Investors need to do their due diligence when selecting an ETF to invest in and should consider the ETF's investment strategy, management fees, and reputation.
In conclusion, the rise of thematic ETFs reflects the changing preferences of investors who are increasingly interested in investing in companies that align with their values. While these ETFs offer diversification benefits and the potential for high returns, investors need to be aware of the risks associated with investing in specific industries or themes. As with any investment, investors should carefully consider their investment objectives, risk tolerance, and investment horizon before investing in a thematic ETF.