Thematic ETFs are all the rage. Here are five of the hottest ones to invest in
Thematic exchange-traded funds saw fund inflows of about $ 38.8 billion in the first half of the year, up from $ 7.8 billion in the first half of 2020, according to Morningstar Inc. There are now 191 such funds with a combined assets of $ 164.2 billion, up from 55 funds and $ 11.2 billion in assets five years ago.
Investors are moving “from buying individual stocks to thematic ETFs to achieve diversification in some of the world’s fastest growing markets,” said Todd Rosenbluth, CFRA senior director of ETFs and head of fund research mutual funds.
Granted, thematic funds are riskier than ETFs that track the broad market and can crash when enough investors start to believe that a trend has run its course. Cloud computing, for example, while still seen as a strong long-term trend, has recently lost momentum as the pandemic has started to subside and fewer people are working remotely. Until June 30, cloud-based ETFs had net outflows of $ 600 million this year, Morningstar reports.
The Wall Street Journal has asked a number of ETF experts to identify themes that they believe are likely to produce strong returns for years to come. Here are five:
1. Cloud computing
In 2020, the pandemic accelerated the migration to the cloud for all types of business applications as more people were shopping online and working remotely. Today, despite appeasement of pandemic concerns in many places, demand for cloud computing continues. Many countries have ongoing cloud-based development projects that are expected to drive the market growth globally. Deloitte predicts a 30% compound annual growth rate for the cloud industry through 2025.
First Trust Cloud Computing (SKYY) is a $ 5.8 billion fund that focuses on large cap companies such as Microsoft, Oracle and Amazon.com. Although it is up 11.5% this year through June 30, it has a total year-on-year return of 42.5%. WisdomTree Cloud Computing Fund (WCLD), a $ 1.1 billion fund that tracks an index of 50 companies, is up 4.4% this year as of June 30, but is posting a year-over-year return of 43, 5%.
“Spending on cloud technology continues to accelerate,” says Rosenbluth. “We are in the early stages of this boom. “
Downside risk: Demand for thematic ETFs in cloud computing has declined in recent months as the effects of the pandemic wear off and states generally reopen. If employers shift their technology spending to support on-premises staff, cloud companies may face less demand.
New cannabis and hemp industries are emerging in the United States through some form of legalization in 36 states and the District of Columbia. Congress reintroduced legislation to federally legalize recreational and medical marijuana across the country. With the Democrats controlling both houses, this has a good chance of passing. The legal cannabis market is expected to double to $ 41.5 billion by 2025, according to New Frontier Data.
Amplify Seymour Cannabis ETF (CNBS) is a $ 145 million fund that invests 80% of its assets in companies that derive 50% or more of their income from cannabis and hemp. It has cumulative returns of 47.7% and one-year returns of 136.6%. Global X Cannabis ETF (POTX), a $ 191.5 million fund, has a cumulative return of 40.1% and a one-year return of 38%.
“Cannabis is one of our main themes this year as states move to legalize it for revenue generation,” said Jay Jacobs, senior vice president and head of research and strategy at Global X AND F. “This is the tipping point for the cannabis industry.”
Downside risk: Cannabis companies face changing compliance challenges. At the same time, increasing competition from big brands is driving industry consolidation, which may portend volatility in the sector in the years to come. Small cap cannabis companies have limited resources to overcome these challenges.
President Biden’s US Jobs Plan aims to create millions of jobs through infrastructure spending. While the initial plan’s $ 2 trillion price tag put Democrats and the GOP in a bind, a lean two-party version of around $ 1,000 billion might have a better chance of succeeding.
Global X US Infrastructure Development ETF (PAVE) invests in all players in the construction supply chain, including raw material producers and engineering service providers. It is up 21.4% this year and is posting a year-over-year return of 69.3%. IShares US Infrastructure ETF (IFRA) also invests in construction and materials companies, as well as railways and utilities. It has a one-year return of 51.8% but is up 18.4% year-to-date.
“Investing in infrastructure is a way to stimulate the economy,” says Jacobs. This is an area of consensus between Democrats and Republicans. “
Downside risk: The bull run in these stocks could end if the infrastructure bill is not passed in Congress.
4. Clean technology
The Biden administration is prioritizing investments in clean technologies such as renewables and electric vehicles. Despite a decline in cleantech stocks in the first half of the year, ETFs in this area posted strong year-over-year returns.
Invesco WilderHill Clean Energy ETF (PBW) is a $ 1.94 billion fund that invests in clean energy and conservation. It has a 131% year-on-year return, but is down more than 9% so far for 2021. Global X Lithium & Battery Tech ETF (LIT), a $ 3.2 billion fund, invests in a range of interests in batteries, from mining to battery. production. It has a one-year return of 129.4% and 17.9% year-to-date.
Downside risk: Clean tech stocks have been dragged into the tech sell-off and industry volatility remains high in the near term. The sector has become congested, reports MSCI, and could drop sharply in the event of an economic downturn or a stagflation epidemic.
5. AI and robotics
Companies are increasingly using AI and robotics to alleviate supply chain issues and increase productivity. The market is expected to grow at a compound annual rate of 20% through 2026 and reach $ 74 billion, according to Mordor Intelligence. It is the centerpiece of many disruptive changes in industries, from manufacturing to space exploration.
The ARK Autonomous Technology & Robotics ETF (ARKQ) has a one-year return of 83.8% and a year-to-date return of 13.3%. Global X’s Robotics & AI ETF (BOTZ), a $ 2.6 billion fund, generated a year-on-year return of 46.6% and a cumulative return of 5.8%.
Mr Rosenbluth said: “Businesses have learned the benefits of automation during the pandemic and have looked for ways to be even more efficient. “
Downside risk: Job losses due to AI and advanced robotic systems in the workplace could lead to a serious setback from unions as low-skilled jobs are delegated to machines. High capital costs could slow the adoption of the technology.
Never miss a story! Stay connected and informed with Mint. Download our app now !!