Thematic exchange-traded funds (ETFs) provide tools for investors who would like to capitalize on macroeconomic, sector and social trends in a low-cost, diversified way. In this article, we discuss what thematic investing is, some examples of investing themes, the potential benefits, and how the iShares lineup of thematic ETFs can be an important element of a diversified portfolio.
THEMATIC INVESTING
Thematic ETFs: What you need to know
WHAT IS THEMATIC INVESTING?
Thematic investing identifies the macro trends changing the world and companies positioned to benefit. These big themes can play out over many years while being impacted by more near-term catalysts (such as a technological breakthrough or a significant legislative change, for example).
THE CASE FOR INVESTING IN THEMES
Markets can be volatile as macroeconomic and market uncertainties drive dramatic swings in sentiment. Companies that are driving innovation or aiming for a long-term structural change may be underrecognized and, therefore, discounted. Investing in firms and industries that stand to benefit from powerful structural changes may provide investing opportunities.
TRANSFORMATIONAL TRENDS
What are some of these long-term structural themes? There are many, but BlackRock is tracking five mega forces:
Digital disruption and artificial intelligence (AI):
AI can automate labourious tasks, analyze huge sets of data and help generate fresh ideas. Digital disruption goes beyond AI.
Geopolitical fragmentation and economic competition:
In a marked departure from the post-Cold War period of increasing globalization, we see countries favouring national security and resilience over economic efficiency.
The transition to a low-carbon economy:
The transition to a low-carbon economy is set to spur a massive reallocation of capital as energy systems are rewired.
Demographic divergence:
Aging populations in major economies are poised to limit how much countries can produce and grow. By contrast, selected emerging market economies can benefit from younger populations
Future of finance:
A fast-evolving financial architecture is changing how households and companies use cash, borrow, transact and seek returns.
WHY ETFs FOR THEMATIC INVESTING
Thematic funds have become important portfolio tools as the ETF universe has expanded and evolved. iShares Thematic ETFs address the challenges of managing and assembling theme-relevant allocations while providing cost-efficiency, liquidity, and convenience.
BENEFITS OF THEMATIC ETFs:
1. Simplicity: iShares Thematic ETFs are a convenient and simple way to gain exposures to long-term structural trends.
2. Diversification: Thematic ETFs can span regions (Canada, U.S., international developed and emerging markets) as well as sectors.
3. Rules-based: iShares ETFs aim to ensure that holdings align with the thematic goal and are regularly reviewed and revised.
4. Low cost: Reasonable management fees help investors keep more of what they earn.
