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How Should Thematic ETFs be Weighted?

This article was originally published on ETFTrends.com.

It is a question that constantly challenges issuers of new exchange traded funds: how should those funds be weighted? Cap-weighted ETFs remain dominant in the ETF space, but there are hundreds of equal-weight funds as well as ETFs that apply other alternative indexing methodologies.

When it comes to thematic ETFs, those funds focusing on narrow but often fast-growing investment niches, some issuers opt for equal-weight products. However, Global X, one of the largest purveyors of thematic ETFs, embraces weighting by market value for its thematic ETFs, such as the Global X FinTech Thematic ETF (FINX) , the first exchange traded fund dedicated to the fast-growing fintech space.

FINX targets companies on the leading edge of emerging financial technology industry, which includes a range of innovations that caters toward businesses engaged in insurance, investing, fundraising and third-party lending through unique mobile and digital solutions.

“The key reason why we opt for the market cap weighted-based approach is to be more representative of industry dynamics,” said Global X in a recent research note. “We view many themes as sector disruptors, or new industries that are challenging existing paradigms. In such emerging industries there is still much to be settled.”

Thematic Approaches to Investing

A thematic approach includes investments that stand to benefit from structural change driven by demographic and technological changes. The Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ) is another example of a cap-weighted thematic ETF from Global X. BOTZ is home to $1.51 billion in assets under management, making it one of the largest robotics ETFs on the market.

BOTZ provides exposure to companies involved in the adoption and utilization of robotics and artificial intelligence (AI), including those involved with industrial manufacturing, medicine, autonomous vehicles, and other applications. The ETF tracks the Indxx Global Robotics & Artificial Intelligence Thematic Index.

“Which company will be the dominate robotics maker in 20 years? Which company will struggle and go bankrupt?,” said Global X. “With a market cap weighted approach, we gain more exposure to the companies as they begin to dominate an industry and reduce exposure to those that are failing.”

Related: China Tech-Related ETFs Are Among the Top Winners as Trade Talks Continue

In many of the industries represented by thematic ETFs, there will always be smaller companies emerging, but cap weighting can still serve investors well.

“Yes, small companies will emerge and challenge the status quo, but in many of these new industries, we think there are substantial economic benefits to being larger. And as a small company begins to prove itself, we’ll begin to own more of that company,” according to Global X.

For more information on thematic ETFs, visit our Thematic Investing Channel.

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