Back to top

Thematic ETFs: Smarter Than Regular Smart Beta ETFs?

Read MoreHide Full Article

It’s been a true transformation for the ETF industry over the last few years. With a size of $3.137 trillion, the global ETF industry hit a record at the end of April 2016. The U.S. market alone boasts a size of over $2.2 trillion, derived from over 1,890 exchange traded products.

While this joy-ride is something to delight in, crinkles of worries must be there on the foreheads of issuers. After all, with such gigantic and successful progress, ideas of new issuances are likely to fall short. There is always pressure for beating the benchmark, navigating tough trading times and last but not the least peer pressure.

Simply put, the days of plain vanilla ETFs or market-cap weighted ETFs are gone and products with several wining attributes, like low volatility or high dividend, are coming on-stream. Commonly, these next generation ETFs are called smart-beta ETFs.

But it seems that the lure for smart beta investing is also diminishing these days. Beating the benchmark on a sustainable basis is tough in the present global backdrop that is fraught with issues. Plus, first-time craze also ebbs when a new investing theme turns older (read: Smart Beta ETFs Not So Smart?).

Probably, this is why issuers are fine tuning the smart beta concepts to make them smarter. For example, Goldman Sachs introduced the ActiveBeta Index concept, Global X has a suite of scientific beta ETFs and so on (read: Can Goldman Dominate the Smart Beta ETF Industry?).

In fact, to make things more competitive and take them a few notches higher, Global X got itself busy in promoting the Thematic investing and launching more products based on it.

Inside Thematic Investing

As per Global X, its family of thematic ETFs looks to track companies that reap returns from “structural changes in people and demographics, technology and innovation, and natural resources, along with companies that exhibit a particular set of desirable values.”

As we can see that the above-mentioned criteria is long-term in nature and less susceptible to sudden changes in economic policies of various countries or a sudden jerk in the market emanating from some geo-political crisis. Instead, these factors look to cash in on some emerging trend in the global economy. As an investor, if you have faith in a particular segment over the long term, only then you should go ahead with that product.

As of now, Global X has four categories in its thematic investment, namely technology, resources, values and people. Not that these ideas are fool-proof as products in technology and resources segments piled up losses previously; but new entrees in people and values segments seem striking at the current level. We’ll tell you why.

People Products

Global X Millennials Thematic ETF (MILN)

This recently launched ETF looks to track companies targeted at the U.S. millennials generation (birth years ranging from 1980–2000). Since millennials seem to be the growth driver of the U.S. economy, outpacing baby boomers in 2015 as the largest generation and has the prospect of comprising 75% of the workforce by 2025, this surely emerges as a long-term bet. Per Global X, millennials now earn about $2 trillion, with income projected to grow to $8 trillion by 2025.

Since millennials have a tendency of splurging on tech-savvy products and eating out, several tech or consumer discretionary ETFs can give MILN little competition.

Global X Health & Wellness Thematic ETF (BFIT)

There is a visible shift in consumers’ taste and preference for health and wellness products which give people a better quality of life. It is already a $3.4 trillion industry. As global life expectancy is projected to surge by 18% by 2100, contribution of health and wellness companies ought to be higher. This explains why investors can have a look at BFIT which revolves around stocks like Whitewave Foods Co, Adidas AG, Herbal Life Ltd, etc.

Global X Longevity Thematic ETF (LNGR)

This new fund tracks companies which depend on people across the globe living longer lives. Now, since older people invest more in health care related products and services, health care will rule this fund. Boston Scientific, Abbvie and Medtronic are the top three firms of this ETF.

As a matter of fact, this fund may face tough competition from other health care and biotech ETFs like iShares Global Healthcare ETF (IXJ), iShares U.S. Healthcare ETF and Guggenheim S&P 500 Equal Weight Health Care ETF (RYH).

Values Product

There is only one fund as yet, namely Global X S&P 500 Catholic Values ETF (CATH).

The fund gives exposure to the companies within the S&P 500 whose business practices follow Catholic values and leave those out that do not. Companies involved in weapons, military products and child labor do not get an entry card into this ETF. The theme falls in the category of socially responsible ETFs, though CATH is quite unique in nature.

Bottom Line

Maybe defined in a different way, thematic ETFs seem quite similar to smart beta ETFs. It’s just that the ideas are innovative and thus the issuer can expect success ahead.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Published in