Capture Today's 5 Market Megatrends with Thematic ETFs

Investors should focus on market megatrends and consider the thematic exchange traded fund approaches that are tailored to them.

In the recent webcast, Dig Deep: The Market Megatrends You Cannot Afford to Miss, Jeffrey Spiegel, Director, US Head of iShares Megatrend and International ETFs, BlackRock, argued that megatrends are driving change.

“Megatrends are the long-term, transformational forces influencing the future of our global economy & society,” Spiegel said.

Specifically, Spiegel pointed to five key trends that BlackRock believes will drive seismic shifts today and for years to come. These include:

  1. Technological breakthroughs
  2. Demographics & social change
  3. Rapid urbanization
  4. Climate change & resource scarcity
  5. Emerging global wealth

Technology is driving exponential progress in the tech sector and far beyond through artificial intelligence, robotics, and cybersecurity. Investors can tap into these segments through targeted plays like the iShares U.S. Tech Breakthrough Multisector ETF (TECB), iShares Cybersecurity and Tech ETF (IHAK) and iShares Robotics and Artificial Intelligence Multisector ETF (IRBO).

Longer lifespans and modern lifestyles will change medicine and consumer habits, affecting things like genetics, immune system research, and aging. ETF strategies like the iShares Virtual Work and Life Multisector ETF (NYSE: IWFH) and iShares Genomics Immunology and Healthcare ETF (IDNA) can capture these new trends.

Mass migration to cities will require new business models and infrastructure that will help growing infrastructure needs, megacities, and advanced transit and transportation systems. For infrastructure-related sector exposure, investors can look to the iShares Global Infrastructure ETF (IGF), iShares Emerging Markets Infrastructure ETF (EMIF) and iShares U.S. Infrastructure ETF (Cboe: IFRA).

Demand for a clean, green tomorrow will advance energy and conservation through technologies like self driving cars, clean energy, and electric vehicles. Consider ETF options like the iShares Global Clean Energy ETF (ICLN) and iShares Self-Driving EV and Tech ETF (IDRV).

Lastly, newly affluent consumers will expand in Asia and across emerging markets, fueling market growth across mainland China, emerging consumers, and digital economies. The iShares MSCI China A ETF (BATS: CNYA), iShares MSCI China Fund (MCHI), and iShares MSCI India ETF (CBOE: INDA) offer ways to target high growth opportunities within the developing economies.

The broader iShares Exponential Technologies ETF (NasdaqGS: XT) provides exposure to developed and emerging market companies that create or use exponential technologies.

3 Reasons You Cannot Afford to Miss the Megatrends

Spiegel highlighted three reasons to consider investing in these megatrends. For starters, the world is changing and so should portfolios. Unconstrained and rapid innovation has been further accelerated by COVID-19, prompting investors to rethink how they access global growth & innovation. Over 97% of new patents filed in 2019 originated from non-F.A.A.N.G. companies. Less than 1% of clean energy, cybersecurity, and genomics iShares megatrend ETFs overlap with the S&P 500. The U.S. share of global GDP is expected to drop 25% over the course of the next 30 years.

Secondly, investors should access targeted, yet diversified exposure. Picking single stocks is hard. Broad indexes can water down your conviction. Megatrend indexes allow you to target high-conviction trends without going too broad.

Additionally, megatrends are an engaging client conversation starter. Spiegel believes megatrends focus on intuitive long-term opportunities that can help you get ahead of client demand and engage with existing and prospective clients. They focus on tangible, long-term opportunities, helping clients stay engaged and invested.

Thematic ETFs Are Thriving

Jeremy Zhou, Vice President, Head of Indexing Solutions, FactSet, pointed out that thematic investing used to be mainly an active endeavor. However, through customized indexing methodologies, targeted ETF strategies can provide a systematic approach to thematic baskets.

Specifically, Zhou explained that algorithmic thematic index creation can provide actively managed investment styles within a structured, rules-based indexing methodology. He attributed the rapid growth to advances in company data that have helped passive thematic strategies explode in recent years.

For example, Zhou argued that BlackRock megatrend products are developed and managed to capture each theme’s unique value chain, are built only when themes become truly accessible, and are constantly evaluated and evolving at the rapid pace of megatrend innovation.

Megatrends offer potential for excess returns in your portfolio while maintaining a similar exposure and risk profile, according to Zhou.

“Adding megatrends doesn’t have to mean adding risk,” Zhou said. “Use megatrends to seek excess returns within your portfolio while maintaining a similar exposure and risk profile.”

Financial advisors who are interested in learning more about megatrends in the market can watch the webcast here on demand.