A lot of thematic ETFs are oriented toward participating in certain sectors. “The more popular ones focus on new technologies or the fourth industrial revolution or however you want to define it,” Lavine says.
That includes the likes of blockchain, artificial intelligence, big data analytics and robotics. Cybersecurity is another big theme. In other words, these are disruptive or pervasive technologies that are defining the way people live and work in the 21st century.
Investing in these types of themes via ETFs seems like a no-brainer path to riches. But of course, it’s not that easy. Financial advisors and investment managers know they need a thoughtful, disciplined approach to thematic ETFs in order to maximize the potential benefit these products can bring to investment portfolios.
Let The Dust Settle
Jay Batcha, founder and chief investment officer of Optimal Capital in Traverse City, Mich., says “themes” can be a “loaded word” when it comes to ETFs.
“Themes could be a fad, it could be an isolated trend, it could be any number of things,” he says. “Why are they creating a thematic ETF? Because they think it will raise assets? You have to distinguish between something that’s just a trend and something that’s an investable trend where there are fundamental characteristics supporting the growth of that trend.”
Mike Venuto, Toroso’s chief investment officer, says his firm defines “thematic” as expressing global growth themes that span multiple sectors or industries and which don’t meet traditional definitions of a sector or industry. That includes some of the aforementioned fourth industrial revolution-type businesses.
He notes that thematic ETFs bring liquidity and investing options to themes that are often difficult to trade.
At Optimal Capital, one of the hats the company wears is that of an outsourced investment manager that builds portfolios for financial planning firms and hybrid independent broker-dealer RIA firms. “For those folks, we use all-liquid investments with ETFs and some ’40 Act mutual funds,” Batcha says. “We take a sophisticated approach with ETFs beyond traditional 60-40 allocations.”
And that includes the use of thematic ETFs. “When it comes to AI, robotics, blockchain, drones or internet security, we’re not expert enough to know which companies will emerge as winners,” he explains. “The ETFs are a nice way to have some intellectual capital and diversification because inevitably in these nascent industries there will be winners and losers, and there will be fewer winners than losers. So you have to take a play-the-field approach with this stuff.”