New ETFs so hot right now, but tread carefully with your cash

Bored of banks and miners? You can now own slices in hot new industries such as hydrogen, robotics and cybersecurity, but research before you buy.

They’re cool, sexy and taking the world by storm – which is quite a feat considering they have one of the most boring names in the world of finance.

Thematic exchange traded funds (ETFs) are giving Aussie investors the chance to buy into some of the hottest sectors and themes on the planet including clean technology, video games, cybersecurity and robotics.

Traditional ETFs have been in Australia for a couple of decades and spread investors’ money across all stocks in an index – such as the ASX200 or the S&P 500 in the US – to provide instant diversification.

The thematic evolution focuses on individual sectors, and more than half of the 22 new ETFs launched in Australia in the past year have been thematic funds. Globally, these investments more than doubled last year to $350 billion.

Critics say thematic ETFs lack diversification, are often launched after the horse has bolted and in a sector that is already booming, and overseas ETFs have been built around short-term “gimmicks” such as Covid or 5G.

Artificial intelligence is one of the hot new trends appealing to ETF investors.

The two most prominent providers in Australia, BetaShares and ETF Securities, say they focus on long-term megatrends rather than short-term spikes and urge investors to do the same.

“It seems sexy because it’s topical, but we are seeing more financial advisers using thematic ETFs,” says ETF Securities head of distribution Kanish Chugh.

He says holding ETFs containing international companies help investors overcome “gaps in the Australian market”.

Thematic ETFs have eye-catching ASX codes. ETF Securities launched a Battery Tech & Lithium fund – code name ACDC – in 2018 and received less than $14 million of investor inflows in its first two years. But it exploded in popularity in 2021, with inflows passing $400 million thanks to the fund generating average returns above 30 per cent for three years.

Chugh says investors looking to buy thematic ETFs should think long term and avoid them if they are not tolerant to risk.

“Make sure you identify it as a megatrend – is it long-term and has government support?” he says.

“Is it aligned to your views and values?”

BetaShares CEO Alex Vynokur says thematic ETFs are starting to replace traditional stock picking.

“For example, many investors can see that cloud computing, cybersecurity and efforts to address climate change are long-term megatrends which have decades of growth ahead,” he says.

Kanish Chugh from ETF Securities suggests identifying megatrends. Picture: Michele Mossop

“Investors should use thematic ETFs as portfolio satellites to enhance returns.”

Vynokur says ETF investors should:

• First think about their goals, time horizon and risk tolerance.

• Determine what assets they will own based on their strategy.

• Make compounding their friend through extra contributions and reinvestment.

• Regularly review their portfolio and rebalance if required.

“Investors should be cautious about using any thematic ETF that is based on a short-term theme. A true thematic ETF should be based on a megatrend that will play out over the long term,” he says.

CEO of online investing group Six Park, Pat Garrett, says he has seen a shift from active share trading to ETF investing across global shares and asset classes.

He says the best approach for investors is “strong investment diversification”.

“There’s sadly no crystal ball to tell any of us exactly where to invest for the best return at any given time – ultimately, diversification is the best protection against uncertainty and a great way to take a bet each way with your investments,” Garrett says.

Lonsec Research director Peter Green says thematic ETFs are especially popular among younger investors who are comfortable with digital trading platforms.

He says people should research exactly where a thematic ETF invests and its risks, as some are much more concentrated than traditional ETFs.

“For instance, these thematic ETFs could hold 30 stocks and have heavy weighting to the top five – this means your investment is heavily reliant on these five stocks performing,” Green says.

Betashares founder Alex Vynokur says portfolios should be reviewed. Picture: Hollie Adams

THEMATIC ETF EXAMPLES

The ASX codes of thematic ETFs give investors a quirky clue to where their money will be invested:

ROBO: Invests in robotics, automation and artificial intelligence companies globally.

SEMI: A global semiconductor index of 30 stocks across the microchip spectrum.

FANG: Facebook, Amazon, Apple, Netflix, Alphabet (Google) and a couple of others.

ACDC: Battery technology and lithium stocks.

CLDD: Access to cloud computing global leaders.

HACK: Focuses on global cybersecurity companies.

ESPO: Video gaming and eSports companies.

CURE: Offers exposure to US healthcare biotechnology companies.

HGEN: Invests in the fast-growing hydrogen economy.

CRYP: This new cryptocurrency innovators fund invests in businesses, not pure crypto.

Originally published as New ETFs so hot right now, but tread carefully with your cash