Thematic ETFs invest in companies poised to benefit from long-term transformative changes that offer the opportunity for exponential growth. While self-directed investors have been driving the flows, these ETFs are gaining traction with advisors as well.
“Advisors are increasingly using thematic ETFs as a replacement for sector funds to gain more precise exposure,” explained Armando Senra, head of Americans ETF and index investing at BlackRock. “We have built diversified products where we have high conviction of the long-term benefits of a theme.”
Indeed, iShares expanded its thematic ETF line-up this week with two new products. One, the iShares Blockchain and Tech ETF (IBLC), is tied to blockchain, and the other, the iShares Emergent Food and AGTech Multisector ETF (IVEG), is tied to emergent food. BlackRock believes that these funds can benefit from new consumer trends, including decentralized digital ecosystems and sustainability.
However, iShares is far from alone in building out the thematic suite this year, as First Trust, Goldman Sachs, Roundhill, ProShares, and WisdomTree were among the asset managers to launch thematic ETFs in 2022. There are more than 200 thematic ETFs trading in the U.S.
Many of the thematic ETFs cross traditional GICS sector lines. For example, IVEG has a double-digit percentage of assets in consumer staples, industrials, and materials companies with smaller stakes in healthcare and information technology.
While emergent food is a relatively new theme available in an ETF wrapper, some more established ones remain relevant in 2022. “With near record low employment and ongoing supply chain issues, robotics and self-driving vehicles can help the U.S. become a more productive economy,” according to Gargi Chaudhuri, head of iShares investment strategy Americas.
In the robotics theme, iShares offers the iShares Robotics and Artificial Intelligence Multisector ETF (IRBO), but advisors should also consider index-based peers Global X Robotics & Artificial Intelligence ETF (BOTZ) and the ROBO Global Robotics & Automation Index ETF (ROBO).
Meanwhile, within the electric vehicle or self-driving theme, the iShares Self-driving EV and Tech ETF (IDRV) is an index-based peer of the Global X Autonomous & Electric Vehicles ETF (DRIV), the First Trust S-Network Future Vehicles & Technology ETF (CARZ), and the KraneShares Electric Vehicles & Future Mobility Index ETF (KARS).
These themes are also captured in actively managed ETFs such as the ARK Innovation ETF (ARKK) and the Franklin Intelligent Machines ETF (IQM).
Notably, the aforementioned ETFs have performed differently in the last one and/or three years than peers, due more to what is inside the respective funds than their expense ratios.
Advisors have some exposure to companies that are benefitting from blockchain, robotics, and self-driving trends in S&P 500 Index-based ETFs that dominate client portfolios, but perhaps not enough. “A lot of the innovation is happening at small-cap companies that are underexposed,” countered Jay Jacobs, head of thematics and active equity ETFs at BlackRock.
For example, IDRV holds Altair Engineering (ALTR), CEVA (CEVA), Dropbox (DBX), as well as Advanced Micro Devices (AMD), Apple (AAPL), and Microsoft (MSFT).
While some thematic ETFs are down in value in 2022, we believe that advisors using these products are looking longer term and are likely to remain excited about them because, as Senra noted, “they are relatable.”
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