The coronavirus pandemic has changed our economy and the way we interact with the world, fueling the rapid transition to a more digitally connected world, and pushing investors toward next generation exchange traded funds that try to capture these new opportunities.
“A tectonic shift of this magnitude may create tangible opportunities, and investors are likely to seek out specific exposure tools to capture one or all of these next-generation (NextGen) trends. As a result, thematic ETFs are likely to become more popular than those that adhere to the market-cap-weighted archetype or traditional sector frameworks,” according to a recent State Street Global Advisors research note.
However, SSGA noted that thematic ETFs and their portfolio construction can vary significantly. Consequently, investors will have to do their due diligence as these ETF offerings are spread over such an extensive range.
For example, SSGA has looked at the New Economies framework developed by their partner S&P Kensho and grouped them into 12 thematic categories based on their fund objective, including Broad Innovation or innovation throughout the economy; Clean Energy or renewables firms with low carbon footprints; Cloud Computing that includes cloud storage and cloud based software; Democratized Banking or digital payments and encrypted banking technology; Final Frontiers that include space and deep sea exploration; Future Communications that cover 5G networks, streaming media and videogames; Future Security or cybersecurity and drone technology; Human evolution through advanced medicines and health care solutions; Intelligent Infrastructure such as smart cities, power grids, and water technology; New Consumer or e-Commerce and gig economy; Robotics & AI as well as advanced manufacturing; and Smart Mobility that includes ride sharing and autonomous vehicles.
“The pandemic has led to an inflection point that may present NextGen opportunities that are not currently well represented in traditional market exposures. But choosing single stocks for exposure to this new wave of innovation comes with significant risk: not all ‘innovative’ firms innovate successfully. A diversified investment approach that is non-market cap weighted, like a thematic ETF, is optimal when targeting thematic NextGen trends,” according to SSGA.
State Street offers a line of next generation ETFs in partnership with Kensho, including the SPDR Kensho Clean Power ETF (CNRG), SPDR Kensho Final Frontiers ETF (ROKT), SPDR S&P Kensho Future Security ETF (NYSEARCA: FITE), SPDR S&P Kensho Intelligent Structures ETF (SIMS), SPDR S&P Kensho New Economies Composite ETF (NYSEArca: KOMP), and SPDR S&P Kensho Smart Mobility ETF (HAIL).
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