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Some Thematic ETFs Find Validations, Others Are Searching For It

ETF Professor

As the exchange traded funds industry has matured, funds dubbed “thematic” have proliferated. Thematic ETFs are often industry funds targeting a newer, fast-growing segment of a traditional sector, such as cloud computing, cybersecurity or robotics.

When the idea of thematic ETFs was still relatively new, some of these funds were panned by critics. For example, the First Trust Cloud Computing ETF (NASDAQ: SKYY) was panned when it debuted in July 2011. Today, that fund has $1.82 billion in assets under management.

What Happened

Thematic ETFs continue coming to market. Last week, VanEck introduced the VanEck Vectors Video Gaming and eSports ETF (NYSE: ESPO), which will compete with the ETFMG Video Game Tech ETF (NYSE: GAMR).

“Thematic ETFs have been popular when narrowly focused within the technology or the new communications services sector, as investors have looked to complement existing growth or sector-based ETFs with more targeted approaches,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Monday. “These include video gaming, cyber security and robotics trends.”

Not all thematic ETFs take off. While myriad data points highlight solid fundamentals for the e-sports and video game industries, GAMR is over two years old and has just $120 million in assets under management.

Why It's Important

Given time, ESPO and GAMR can become successful ETFs, but there are challenges facing thematic ETFs and not all can live up to the standards set by SKYY and ETFMG Prime Security ETF (NYSE: HACK). HACK, the first ETF to focus on the cybersecurity industry, is widely considered one of the standard bearers among thematic ETFs.

“In marketing materials on ETFMG’s website, the ETF provider points to research predicting 12%-15% year-over-year cybersecurity market growth through 2021,” said Rosenbluth.

As has been seen with HACK and GAMR, thematic ETFs have a way of attracting competition. That is much is seen among robotics ETFs, including the ROBO Global Robotics and Automation Index ETF (NASDAQ: ROBO) and the Global X Robotics & Artificial Intelligence ETF (NASDAQ: BOTZ).

This year, several more robotics ETFs have come to market to challenge ROBO and BOTZ.

What's Next

“Investors are likely to continue to look to round out their asset allocation strategies with thematic ETFs, aiming to capture long-term strategies. While the easy approach is to choose the cheapest ETF, CFRA encourages a look inside the portfolio to understand what makes one ETF unique from another,” said Rosenbluth.

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