Exchange traded funds allow investors to access broad swathes of the market or thin sector slices. As more grow accustomed to the ETF investment vehicle, traders are taking a more hands on approach, targeting smaller segments of the market in an attempt to generate alpha.
With most of the broad market segments already accounted for, fund sponsors are beginning to target thematic investing where they select socks with links to a particular subject rather than a single sector in what Morningstar star has dubbed the “spaghetti cannon” approach, reports Jennifer Thompson for the Financial Times.
As of the end of 2016, there were 447 thematic ETFs available, compared to 183 in 2012, with assets growing to $77.9 billion from $41.4 billion.
“Investors were saturated by plain vanilla [products],” Vafa Ahmadi, head of the thematic equities team at CPR Asset Management, told FT. “We needed something else.”
These thematic investment approaches allow fund managers to be creative. For instance, the Inspire Global Hope Large Cap ETF (NYSEArca: BLES) and Inspire Small/Mid Cap Impact ETF (NYSEArca: ISMD) are targeted toward conservative Christian investors while The Obesity ETF (NasdaqGM: SLIM) targets those that fight against global obesity.
Proponents of these thematic ETFs argue they allow investors to capitalize on structural changes, be thy demographic, lifestyle related or technology, which wold not be possible with traditional beta index funds or a simple portfolio concentrated on a sector.
A number of new theme-based strategies that have resonated with investors, including the Global X Millennials Thematic ETF (NasdaqGM: MILN), which tracks consumer sectors and tech and media companies that millennials are most familiar with. Principal has also come out with its own Principal Millennials Index ETF (NasdaqGM: GENY) to compete against MILN.
Related: Quality Matters for Dividend ETF Strategy
The SPDR Gender Diversity Index ETF (NYSEArca: SHE) has also attracted a lot of attention as the ETF focuses on companies with a greater diversity and having more women on boards compared to peers.
“There is an interest in the market for responsible investing,” Fabien Labouret, global head of investment strategies at Barclays, told FT, adding that this interest is especially strong from retail investors and pension funds.
Additionally, the ARK Web x.0 ETF (NYSEArca: ARKW) is an actively managed ETF that focuses on disruptive companies that help transform the market, covering the theme of the next generation of internet and tech companies.
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