Leveraging Thematic ETF Investing for Long-Term Exposure

Note: This article is courtesy of Iris.xyz

By Jeff McCarthy, Head of ETP Listings, Nasdaq

Themes—whether in movies, books, parties, or décor—can be a powerful way to draw people’s attention. With this in mind, it’s no wonder financial advisors and individual investors have become more and more focused on themes in investing as well. Not only can thematic investing help target unique opportunities for growth, but funds that focus on Socially Responsible Investing (SRI) and Impact Investing also give investors the ability to align their assets with their personal values by investing in the things they care about most. Healthy foods and lifestyles. Green energy. Healthcare. Eco-friendly housing. Whatever the passion, there’s probably a theme to match. And yet this approach isn’t purely altruistic. The funds that focus on long-term trends can add alpha generation to the list of benefits—and potentially transform the portfolios of mindful investors.

The power of long-term thematic investing comes with its research-driven approach to identifying traits that make sense over decades—not months or even a single year. Yet the simple reality of a persistent trend doesn’t necessarily make it a strong candidate as a thematic ETF. According to Nick Cherney, chief investment officer at Janus Capital Group, the key to success is seeking precise exposure in areas that meet these three criteria:

The theme must be, above all, investable.

It’s one thing to recognize that Baby Boomers are aging. That’s a simple demographic fact. But determining a clear way to invest in that shift is vital. A spike in the need for healthcare providers isn’t enough to focus on the trend. But investing in long-term care services targets the trend by capturing investable stocks that create a long-term tilt towards the aging population—something that is certain to continue far into the future.


The numbers must support delivery in a strategic ETF.

Unlike picking a singular stock, the strength of ETFs sits with a fund’s ability to diversify through the power of numbers. Even if a theme is qualified as a long-term, investable trend, there must be enough strong stocks to include in order to dilute risk and increase the potential for long-term gain. When ETFs were first emerging a decade ago, organic food companies were beginning to trend, but there weren’t enough players to warrant a strong thematic ETF. With the number of companies in this theme increasing every day, organics can now deliver the numbers needed to support a well-rounded ETF.

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