Are thematic ETFs just a cunning sales gimmick to entice millennials to ‘pile on’ to a trending topic, or a genuine trading vehicle that’s likely to perform? An investment firm CIO is urging investors to dig deeper or risk buying into pure fantasy, not reality.
While he accepts that exchange-traded funds (ETFs) give retail investors unusual access to a broad basket of securities, Alvia Asset Partners’ CIO Josh Derrington believes millennial investors should tread with care when it comes to purchasing theme-based or thematic ETFs.
“I believe there's lots of contributing factors that feed into the way thematic ETFs are put together, with the key proponent being what’s topical or seasonal at the time.
“That’s why one of the first questions millennials should ask when considering whether to invest in a theme-based ETF is ‘why’ they’re seeing that particular ETF right now, and whether the firm producing the ETF is more focused on selling a product than providing a shrewd investment opportunity.
“One of the indicators we scrutinise when contemplating investing in an ETF is what’s under the bonnet? In other words, is the ETF actually supported by direct holdings of equities, or is it synthetic, with ownership of the holdings resting elsewhere?” he said.
According to Derrington, current investment themes proving popular right now include robotics or artificial intelligence, so it makes sense for firms to create ETFs around these themes to satisfy the demand for that product.
“Pivotal to any decision to invest in an ETF should be to whether the companies within the portfolio will actually benefit as you hope, and whether the trend will play out in the timeframe you believe.
“Exploring the robotics theme more closely, we’d want investors to consider how the ETF is invested in robotics. For example, does it actually own a robotics company, or a semiconductor company, which makes the chips for the robotics?
“Unfortunately, when you do scratch beneath the surface, more often than not you’ll find things you might not have invested in if you were trying to build a portfolio of robotic, or even AI stocks,” he said.
The central tenet to Derrington’s concerns centre around the millennial buyer being more aware of what they’re buying when purchasing thematic ETFs, and not falling prey to the ‘sizzle’ that is pushing a trendy theme.
“Just recently we looked more closely at a blockchain ETF and found its largest holdings were in AT&T, Microsoft and Amazon.
“And while we can’t be sure how these companies fit within a blockchain ETF, as an investor in that ETF, you might have expected to have more exposure to blockchain. Instead, what they’ve got is exposure to AT&T, Microsoft and Amazon.
“Sure, these companies might benefit from blockchain, but their price movements will certainly be driven by almost everything other than blockchain adoption,” Derrington said.