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ETF market primed to shift from vanilla funds to thematics
Exchange-traded funds (ETFs) have soared in popularity since their introduction in the 1990s, and Australian investors, while a bit late to the game, have been driving increased inflows. According to Global X ETFs Australia, the market is on the verge of a shift, with vanilla ETFs set to give way to thematic funds that will drive growth for the next five years.
Discussing the major investable trends Global X sees as shaping the ETF sector, Global X head of investment strategy Blair Hannon said the end of the COVID-19 pandemic is leading to a “new normal” for thematic investing in the Australian ETF market.
“Thematic ETFs have enabled investors to be nimble and respond to market moves locally and abroad,” Hannon said, noting that during the pandemic, inflows into thematic funds peaked at more than US$20 billion. “Although flows have tapered off, levels are still sitting higher than before the corona crash in March 2020, indicating an appetite from investors to capture thematic opportunities.”
He noted that Australia’s ETF market has historically been dominated by vanilla funds but said thematic ETFs are expected to take a greater share of inflows going forward as product innovation gains momentum. “As providers, we need to be at the forefront of megatrends which will offer value to investors.”
Long-term structural trends
Investing in thematics is “vastly different” from thinking about the core of a portfolio, Hannon said, with a huge focus on information and research. It’s important for investors to think about the risk-return positions they want, he said, referring to an S curve ranging from newer, riskier technologies to more established ones with less room for growth.
“Where you want to be as an investor is capturing the early-adopter and early-majority phase of the S curve,” he said.
Thematic ETFs identify long-term structural trends and leverage them to build wealth over time, according to Hannon. “We are identifying powerful macro-level trends and the companies that stand to benefit from those trends over the years to come.”
As decarbonisation efforts continue to pick up speed, for instance, thematic opportunities will open up, allowing investors seeking innovation and opportunity to access key investment trends, such as the metals needed for the energy transition, blockchain technologies, and artificial intelligence and robotics. For instance, with copper and lithium, which are key for decarbonisation, “the supply and demand dynamics of are going to be out of whack in the very near future,” Hannon said.
“If you’ve got a situation where copper supply and demand is very tight, then demand is about to go up.” Moreover, the tightness of supply is prompting bigger companies to buy smaller ones for mining, creating an active mergers-and-acquisitions backdrop.
“Millennial and younger investors particularly love that they can invest in specific sectors according to their special interests and personal values,” Hannon said.
“The ever-expanding selection of thematic ETFs alongside core ETFs that track benchmark share and bond market indexes as well as important commodities such as gold is allowing investors to build entire portfolios using ETFs. This is happening as the active funds management industry comes under greater pressure.
