New ‘thematic’ ETFs test the boundaries

With so much choice, investors must drill down and review the underlying stocks in the ETF to make sure they are comfortable with what they are getting.

With over 210 exchange-traded funds available on the ASX and one new ETF being added per month, ASX investors are spoilt for choice. However, as ETF providers scratch their heads for new ideas to launch, the new funds are becoming more and more niche in an attempt to grab investors’ attention in a very big market.

Ten years ago when ETFs first launched in the Australian market, they were marketed as a low-cost way to gain broad market exposure to particular indices such as the ASX 300 or the S&P 500. However, today investors need to be a lot more discerning around their choice of ETF as they can inadvertently move into something with a lot higher risk and a lot narrower focus than they expected. 

Many of the newer ETFs are ‘‘thematic’’ ETFs in contrast to the traditional broader ‘‘sector’’ ETFs — they concentrate on a niche such as gold rather than a wider index such as the S&P 500. 

BetaShares chief executive Alex Vynokur says: “The distinction between a theme and sector can be somewhat blurry for investors, with ‘thematics’ and ‘sectors’ sometimes used interchangeably, depending on who you are talking to.

“Perhaps the most useful point of difference for investors lies in how the fund has been constructed to provide its exposure. Sector ETFs typically aim to track an index that measures the performance of a specific industry sector, for example global healthcare. Thematic ETFs, on the other hand, do not focus on sector classifications or geographic boundaries. Instead, they are often constructed to provide exposure to a range of industries that stand to benefit from particular structural megatrends.” 

With the ETF market saturated with the more established sector ETFs, the newer thematic ETFs need to be different and exciting, often being explicitly forward-looking and tapping into economic changes investors can see taking place around them such as disruptive technologies, changing demographics and consumer behaviours. 

BetaShares has multiple sector and thematic funds in the technology sector. The BetaShares Nasdaq 100 sector ETF invests in the biggest 100 companies in the US technology index. For investors who want to target themes within the technology sector rather than just buy the whole index, BetaShares has a cybersecurity ETF (ASX code: HACK). It provides exposure to the cybersecurity theme through its portfolio of cybersecurity companies from a wide range of global locations, including well-established names such as Cisco and Palo Alto Networks, and smaller, fast-growing innovators including CyberArk and Itron.

Similar thematic ETFs in the technology sector include ETF securities global robotic and automation ETF (ASX: ROBO) and FANG+ (ASX: FANG) which invests in the top innovators among today’s technology and internet/media companies. 

As the industry develops the niche sector continues to evolve. ETF provider VanEck is even launching a video gaming and e-sports ETF (ASX: ESPO).

While thematic funds are the flavour of the day, the new products continue to test the concept. Some ETF providers are looking to spice up their existing offering of sector ETFs. ETF Securities has launched a new leveraged ETF for the Nasdaq. If you think the Nasdaq will fall, you can buy SNAS which shorts the Nasdaq by 200 to 275 per cent, whereas if you want to gear up on the Nasdaq, LNAS gives you 200 to 275 per cent long exposure.

Interestingly, SNAS is down 20 per cent since its July launch whereas LNAS is up 20 per cent.

In terms of risk, Vynokur of BetaShares says: “In common with all investment approaches, thematic investing is not without risk. Given the long-term nature of mega-trends, there is the risk that the trend will take longer than expected to be established — or even that it does not materialise at all. In saying that, we believe thematic exposures as part of a well-diversified portfolio can provide exciting potential for returns, and exposure to markets previously difficult, or impossible, to access.” 

Another risk is in the somewhat dubious nature of the ‘‘index’’ that some thematic ETF tracks. It may be a synthetic index composed of several indexes determined by the ETF provider or an index that is not well established. 

Whether you want to target global agricultural companies, battery technology stocks or even the top 50 stocks on the National Stock Exchange of India, there is likely an ETF for almost anything you would consider investing in.

But with so much choice, investors must drill down and review the underlying stocks in the ETF to make sure they are comfortable with what they are getting, rather than just rely on the ETF name. 

James Gerrard is principal and director of Sydney financial planning firm www.financialadvisor.com.au