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The Rising Importance of Thematic ETF Investment Opportunities

This article was originally published on ETFTrends.com.

As investors grow more familiar with ETFs, many are using targeted ETF strategies to gain focused exposure to specific market themes and potential opportunity sets.

"Exchange traded funds are constantly evolving, trying to do something new and something fresh," Taylor Ames, Vice President of Product Strategies for ALPS, said at the 2018 Morningstar Investment Conference. "You're starting to see the research and popularity with thematic investing. Smart beta and factor investing is something really becoming established within the industry. But now, what you're starting to see is investors wanting to invest in specific themes - things they are convicted about, things they want to be invested in."

Ames singled out the ESG or environmental, social and governance theme that is growing in popularity as investors look for ways to gain exposure to the markets through a socially conscientious manner, investing in things that they personally believe in without sacrificing returns.

For example, the Workplace Equality Portfolio (EQLT) provides a socially responsible spin on companies that support lesbian, gay, bisexual and transgender (LGBT) equality in the workplace.

EQLT’s screening criteria include mandatory language in a company’s equal employment opportunity statement prohibiting discrimination based on sexual orientation and gender identity, offering health benefits to same-sex partners or spouses of employees, along with other corporate benefits and privileges. Other screens are performed with the goal of eliminating companies that would detract from the Index such as companies in bankruptcy or reorganization.

By adhering to the equality route, EQLT provides smaller stocks a louder voice in the performance, compared to traditional market-cap weighted investments. The greater tilt toward smaller companies can increase returns in a broad market rally, when small-caps tend to outperform, but it also brings added risks.

For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.