At the end of third quarter, there were 119 thematic ETFs with a combined $25 billion in assets under management (AUM), according to a thematic landscape report prepared by asset manager Global X.
While the base remains relatively small—CFRA rates 30 equity and fixed income ETFs each individually with more than $25 billion in assets—the assets in thematic ETFs increased fourfold since 2015, as investors increasingly look for long-term growth ideas, and seek the diversification and tax efficiency benefits of the ETF wrapper.
However, the range of thematic investment approaches warrants further scrutiny to understand what’s happening.
More Choices Than Ever
“We saw a need to accurately identify these thematic ETFs, categorize them in a logical and consistent manner and share industry-level statistics about the developments in the space,” explained Jay Jacobs, head of research and strategy at Global X ETFs.
Global X recently grouped thematic ETFs into three categories (disruptive technology, people and demographics and physical environment), under which there were 10 mega themes (big data, climate change, digital content, new consumer, robotics, etc.) and, drilling deeper, there were more than 30 themes (AI/automation, cannabis, cloud computing, cybersecurity, millennials and Gen Z, resource scarcity, video games, etc). We found the resulting data interesting.
For example, in the third quarter of this year, AUM in physical environment funds rose relative to the second quarter driven by climate change products, while disruptive technology and people and demographics fund assets fell. The iShares Global Clean Energy ETF (ICLN) and the Invesco Solar ETF (TAN) had some of the largest asset growth overall.
Cloud Computing Finds Traction
At the thematic level, cloud computing had the highest demand among disruptive technology products, with the First Trust Cloud Computing ETF (SKYY) and the Global X Cloud Computing ETF (CLOU) experiencing inflows in the third quarter.
While these two relatively popular ETFs sound the same, the exposure they provide is different when the ETF holdings are reviewed. For example, SKYY has more software industry exposure (70% vs. 57% of assets), but less internet and catalog retail (3% vs. 8%). In addition, SKYY holds an 8% stake in REITs, while CLOU has no such holdings.
Cannabis ETFs Roll In
During the third quarter, there were five thematic ETF products that launched—four of them cannabis related. The Amplify Seymour Cannabis ETF (CNBS), Cambria Cannabis ETF (TOKE), Global X Cannabis ETF (POTX) and The Cannabis ETF (THCX) joined the preexisting ETFMG Alterative Harvest (MJ) and AdvisorShares Pure Cannabis ETF (YOLO) to give investors a wide array of choices to consider when focusing on that new consumer mega theme.
The WisdomTree Cloud Computing Fund (WCLD) was the sixth thematic fund to launch in the third quarter.
Similar Names, Different Exposures
There were also six AI/automation-themed ETFs in the robotics mega theme available at the end of September.
Here, too, what’s inside some popular funds will differ. The ROBO Global Robotics and Automation Index ETF (ROBO) recently had 49% of assets in information technology stocks, higher than the 37% for the Global X Robotics & Artificial Intelligence (BOTZ). In contrast, BOTZ’s industrials stake (44% vs. 36%) was greater. CFRA’s ratings on BOTZ and ROBO reflect our valuation concerns of these distinct holdings.
CFRA does not think ETFs should be chosen based solely on their performance record, given that holdings-driven future results, nor solely by their expense ratio. ROBO, for example, boasts a three-year performance record that is more than 1% stronger than BOTZ’s. BOTZ boasts an expense ratio that is 27 basis points cheaper. The two ETFs share only six names within their respective top 10 holdings lists, highlighting that what’s inside is not the same.
As the thematic ETF universe further gains traction and investors have additional choices, understanding where other investors are—and are not—putting money to work, along with traditional holdings-level and cost analysis, could provide insightful.
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is or will be—directly or indirectly—related to the specific recommendations or views expressed in this research report. For more information, please refer to CFRA's Legal Notice at https://www.cfraresearch.com/legal/.
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