Thematic ETFs that still excite experts

• Specialists show funds with interesting long-term themes
• Apart from volatility and construction issues, several ETFs still attract attention

After enjoying strong returns and inflows early in the pandemic, thematic ETFs have come down to earth with force. Demand for the product has declined, with flows to thematic ETFs across Europe totaling €0.6 billion (£0.5 billion) in the first quarter of 2022, the first quarter since 2019 in which they attracted less than €1 billion. That reflects some terrible performance: to quote some of the hardest hit, the VanEck Crypto and Blockchain Innovator UCITS ETF (DAGB) recorded a brutal paper loss of around 74 percent in the first half of 2022, while DLL Group UCITS Blockchain Equity and Digital Assets ETF (KOIP) before down 67.7 percent over the same period. As our chart below shows, a large number of other funds have incurred losses of at least 30 percent during that time – out of a sample of around 50 thematic ETFs, only five have ended this six-month period in the dark.

These extreme examples reveal some of the main risks of thematic ETFs. They can have important exposure to growth stocks, technology and the broader US market, and are also likely to focus on areas that look more prone to pullbacks. But old concerns remain: that they expose investors to trends or sectors just when demand and valuations are peaking, that portfolio construction techniques can make them too concentrated or focused on only one set of themes, and that they require a high degree of judgment. perseverance. That’s why thematics have once again made limited appearances in this year’s Top 50 IC ETFs list.

If research has shown their failure, we appreciate that the product can fill a gap in the portfolio and is increasingly important for certain investors. We also note that some themes may have the longevity to reward investors in the long run, even if the ups and downs can be severe. So while not many themes have made our latest list, we’ve followed the conventions of the last two editions by outlining the options that currently appeal to our panel of experts.

New nameice

To start with the aforementioned names, the four thematic ETFs on our list are iShares Automation & Robotics UCITS ETF (RBTX)that iShares Aging Population UCITS ETF (AGES)that iShares Global Clean Energy UCITS ETF (INRG) and iShares Digitizing UCITS ETF (DGIT). Despite being overly representative of the market’s largest providers, they all offer long-term exposure to themes in large, liquid funds. Separately, our panel again highlights the benefits of Rize the Future of Sustainable Food UCITS ETF (FOGB), which seeks companies involved in “accelerating the transition to more sustainable systems of food production and consumption patterns and thereby protecting nature and our ecosystems”. The new funds mentioned this time range from timely offers to recent launches, and are some names that might serve as alternatives to the four on our list.

Lynn Hutchinson, head of passiveness at Charles Stanley and one of the expert panelists reviewing this year’s list, has named some of the names offered by Legal & General Investment Management. Our judges commended this outfit for the due diligence done on the thematic products, including regular reviews of what the different funds have in store and how precise they are.

Some of them serve as alternative funds in our top 50 list. Hutchinson prefers L&G Robo Global Robotics and Automation UCITS ETF (ROBG) to iShares funds with the same delivery, citing the provider’s due diligence efforts. The two funds underperformed fairly similarly in the short term, but some of the differences were stark. Although both have fairly small position sizes, the iShares fund has a much wider spread of holdings, with 161 shares in the fund at the start of July compared to 81 in the L&G fund at the end of May.

L&G fund transfers sound more targeted: while the iShares ETF targets companies developing technology in automation and robotics, its rivals define two technology subsectors, including sensing, processing, computing and artificial intelligence, and applications, which could include 3D printing, logistics automation and consumer products. , among others. However, investors are definitely paying for the L&G approach: ROBG has a 0.8 percent fee, a fee that is steep even for a specialist ETF and double the 0.4 per bill on RBTX.

otherchoice

Hutchinson continues to support L&G UCITS ETF (BATG) Battery Value Chain which we mentioned in our 2020 article on thematic options. But he also highlighted L&G Hydrogen Economics UCITS ETF (HTWG) which comes to market in early 2021. A portfolio of just 29 holdings focused on a promising but immature sector, this could be a volatile holding and certainly struggling in the recent sell-off. It also has competition from two other relatively new funds, namely VanEck Hydrogen Economics UCITS ETF (HDGB) and Global X Hydrogen UCITS ETF (GXEU). The L&G fund is the cheapest and biggest name here, with over $500 million in assets and a 0.49 percent fee compared to 0.55 percent for the VanEck fund and 0.5 percent for the Global X option.

Hutchinson notes that Global X’s funds are “small”, which can bring issues such as lower liquidity and higher trading fees. L&G and VanEck funds have striking overlap, and while both are highly concentrated, VanEck funds have a much stronger position size – including an 11.8 percent allocation to Power Plug (US:PLUG) as of July 7th.

To end on something timely, Top 50 ETF panelist and IpsoFacto Investors chief executive David Liddell argued that buyers could use a more granular form of commodity exposure, pointing to the WisdomTree farm ETF as a “pure game farm”. This fund does not appear to be available in the form of UCITS accessible to UK retail investors, but last year we highlighted iShares Agribusiness UCITS ETF (SPAG) as an option. Strong performance, which is rare among thematic and sectoral ETFs in recent times, has yielded returns of just under 10 percent in the first half of 2022 and up nearly a fifth on the year to the end of June.

The fund targets diversified exposure to the global agricultural sector, with around 75 holdings, and most of its assets in consumer staples or stockpiles. Yet the portfolio may be less diversified than it appears, with 60 percent of assets tied in the top 10 and three positions each generating more than 9 percent of funds. This may remain a special position given his specialist approach, as well as the huge gains he has made and could have given up. As Liddell warned in his original farm fund advice, investors could find themselves “late to the party” here.

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