When creating a diversified investment portfolio, ETF investors should consider how thematics can help differentiate a balanced portfolio and leverage disruptors that are upending traditional equity paradigms.
On the recent webcast (available On Demand for CE Credit), How Thematic Equity Can Energize a Portfolio, Jon Maier, SVP and Chief Investment Officer at Global X Funds, explained that given the goings-on in a market of tariffs, appreciating U.S. dollar and strong corporate earnings, many are taking a more inward or U.S. bias approach, which also reflects Global X’s U.S. oriented approach within the Core Series portfolios.
In developing a diversified investment portfolio, Maier outlined the traditional and tactical asset allocation methodologies, but he also added that security selection and exposure to structurally disruptive thematic trends may potentially augment returns over the long haul.
“Over the past 10 years the markets have been more correlated across assets classes, we are looking to position a portfolio so as to take advantage of markets under certain conditions,” Maier said.
Maier argued that themes are relevant to the current environment. A thematic approach includes nvestments that stand to benefit from structural change driven by demographic and technological changes.
For example, the consumer discretionary firms have traditionally targeted the spending preferences of baby boomers and Gen Xers, appealing to suburban lifestyles and material wants. However, Millennials are set to see their incomes rise and inherit trillions from the baby boomer generation. Their unique spending preferences, such as living in cities and favoring experiences, are expected to radically alter what types of products are sold and how they are bought.
A Look at Disruptive Industries
Other industry disruptors include advances in lithium battery technologies where falling costs and rising production of Lithium-ion batteries are leading the shift to renewable energy and electric vehicles.
FinTech allows financial firms to leverage cutting edge technology to reduce costs, improve decision making and risk controls, remove middlemen and enhance customer experiences.
Increasing lifespans and rising health care costs are driving people to proactively improve their health through physical activity, healthy eating and greater mindfulness of their well-being.
Robotics and artificial intelligence are making machines smarter and more capable than ever before, allowing robots to take on increasingly sophisticated tasks for faster and more accurate production. Declining computer chip costs and improving connectivity allows for virtually any object to connect to internet-enabled networks, effectively turning anything into a connected device.
Additionally, people around the world are communicating and sharing information at a rapidly growing pace via new social media channels such as mobile video, chat, photos, podcasts and blogs.
Investors interested in a thematic approach to capitalize on these industry disruptors should think of thematic investing as a satellite position or an equity sleeve in a growth-oriented portfolio, Maier advised. Thematic strategies tend to be alpha-seeking, have a long time horizon and are growth oriented. The thematic investments also transcend classic sector, industry and geographic classifications as many overlap.
“This section of the equity allocation has the potential to differentiate a portfolio and provide exposure to themes with long-term growth potential,” Maier said. “The thematic bucket adds a growth and momentum tilt, but the allocations toward the positions are relatively small in relation to the other positions.”
For example, Maier highlighted some of Global X’s ETFs to help investors find growth opportunities outside of a traditional sector strategy, including the Global X China Consumer ETF (NYSEArca: CHIQ), Global X Lithium & Battery Tech ETF (NYSEArca: LIT), Global X Robotics & Artificial Intelligence Thematic ETF (NasdaqGM: BOTZ), Global X Internet of Things Thematic ETF (NasdaqGM: SNSR) and Global X FinTech Thematic ETF (NasdaqGM: FINX) help investors focus towards thematic growth funds, incorporating ideas of sector disruption across info tech, health care, consumer discretionary, materials, industrials, consumer staples and financials.
Financial advisors who are interested in learning more about equity thematic disruptors can watch the webcast here on demand.