Global X take a deep dive on an approach that is increasingly attractive for investors.
While thematic investing is not a new investment approach, recent trends show that investors are increasingly incorporating this long-term, growth-oriented strategy into their portfolios. Since 2015, assets in thematic ETFs have grown more than eight-fold, with total assets under management (AUM) inching close to $60 billion (USD) at the end Q3 2020.
The rapid pace of technological advancement, the emergence of powerful demographic trends and changing consumer habits, and evolving demands and concerns around the physical environment are creating massive opportunities for disruption across the global economy.
Thematic investing refers to the process of identifying these powerful macro-level trends and investing in the companies that stand to benefit from their materialization.
It is our belief that thematic investing, when conducted properly, should meet three key criteria:
1. High Conviction
Themes should have a high probability of disrupting major segments of the global economy.
2. Investability
There should be dozens of publicly traded companies that have high exposure to the particular theme.
3. Long Time Horizon
The theme should be structural in nature, taking decades to fully emerge.
There are three main reasons to include thematic investing in investors’ portfolios:
1. High Growth Potential
Thematic investing targets companies that are poised to benefit from the emergence of powerful structural trends. These companies tend to have higher growth characteristics than broad market indexes, like the S&P 500 or even the Nasdaq 100. For long-term investors with more aggressive portfolios, thematic investments can potentially improve growth expectations, serving in a complementary role alongside a diversified core.
2. Embrace the Next Wave of Disruptors
The companies that dominate broad market indexes and sector indexes tend to be winners of the past: companies that already experienced rapid growth and delivered superior shareholder returns. But just like today’s leaders disrupted corporate powerhouses from the 1990s and early 2000s, tomorrow’s leaders are likely to be a new group of companies developing revolutionary technologies or catering to new consumer preferences. Thematic investing helps identify these companies early in their disruptive journey, providing investors exposure to tomorrow’s potential leaders.
3. Connecting with Clients Across Generations
Over the coming decades, Baby Boomers are expected to pass $30 trillion to their heirs. At the same time, Millennials are reaching higher income brackets and will represent a majority of the labor force. These demographic shifts create both challenges and opportunities for financial advisors. On one hand, many Baby Boomers are looking to preserve and grow their wealth far beyond their own lifetime. On the other hand, wealth will increasingly be concentrated among Millennials, a tech savvy generation with distinct preferences that are often very different from those of their parents. Thematic investing can play an important role by bridging the gap between generations by helping to build multi-generational wealth over the long term, while also appealing to Millennials’ interests.
ETFs can be an efficient vehicle for accessing powerful disruptive trends. In a single trade, a well-designed thematic ETF can provide access to dozens of companies around the world that are likely to benefit from the rapid growth of a particular theme. This can save investors time needed to research potential themes and companies, as well as transaction costs from trading many securities across various geographies.
Due to their focus on high growth stocks and the long-term nature of thematic investing, we believe that thematic ETFs should be included at levels that are appropriate for an investor’s risk tolerance and time horizon.
Specifically, we believe investors may be well-served by carving out a portion of their portfolio’s equity exposure to create a dedicated thematic growth bucket.
Depending on market conditions and the investor’s time horizon, within a conservative or moderately conservative portfolio we believe that a thematic allocation in the range of 2% to 6% is currently appropriate.
A higher level of thematic exposure becomes appropriate as an investor’s time horizon and risk tolerance increases. Within moderate to aggressive risk profiles, we believe that an allocation in the range of 10% to 23% is currently appropriate.
This dedicated thematic growth bucket ought to contain a handful of different thematic ETFs that have low overlap with each other and the portfolio’s other equity exposures.
Diversifying the thematic exposure is important as themes perform differently depending on market conditions. Due to these themes being long-term in nature, it is preferable to have a buy-and-hold approach to the thematic growth bucket.
Global X ETFs is a leader in thematic investing, offering a comprehensive suite of rigorously designed, research-driven thematic ETFs. Global X first entered the thematic space more than ten years ago, and has since developed over a decade of experience researching, designing, managing, and supporting thematic ETFs.
Our thematic offering currently includes 23 ETFs, the largest and most comprehensive suite of thematic ETFs in the United States.
Global X’s commitment to thematic investing goes beyond launching ETFs. We support our products with extensive thought leadership, from insightful research, to actionable model portfolios.
For Canadian investors, please reach out at this dedicated email address: Canada@globalxetfs.com
