The universe of thematic ETF is booming – by both assets and population – and with that growth comes the need to identify what exactly constitutes a thematic investment concept and how advisors and investors can simplify the process of accessing this landscape.
“We have defined the universe of thematic funds as those that select holdings based on their exposure to one or more investment themes. These themes may pertain to macroeconomic or structural trends that transcend the traditional business cycle. Examples include demographic shifts or technological advances,” said Ben Johnson of Morningstar in a recent note.
The Global X Thematic Growth ETF (Nasdaq: GXTG), which debuted last October, helps simplify the thematic adventure by providing access to multiple, fast-growing themes under the umbrella of a single fund.
The underlying index for GXTG first assigns each eligible Thematic ETF to a traditional sector. Next, at the annual reconstitution, the index applies a quantitative screen on the underlying securities comprising each eligible ETF to determine each ETF’s aggregate sales growth metric. This sales growth metric is used to determine the Thematic ETF with the highest aggregate realized sales growth within a given traditional sector, which ultimately determines the selection for inclusion in the index.
Thematic investing often means embracing a growth bias.
“At the end of 2019, three-fourths of all thematic funds in the U.S. exhibited a growth tilt, as measured by where their portfolios plot on the Morningstar Style Box,” said Johnson.
GXTG currently holds seven other Global X funds, devoting 60% of its combined weight to the Global X Social Media ETF (NasdaqGM: SOCL), Global X E-commerce ETF (NasdaqGM: EBIZ) and the Global X FinTech ETF (NasdaqGM: FINX).
GXTG reaches a lot of corners of the thematic universe, but a key to the fund’s methodology (and advantages) is that Global X has a common sense approach to defining thematic investing. As a result of its dept and diversity, GXTG can be seen as a core holding, not just a tactical strategy.
“Because of their narrow exposure and higher risk profile, thematic funds are best used to complement rather than replace existing core holdings,” according to Johnson. “Some, like Global X Thematic Growth ETF (GXTG), might be considered as part of a core allocation, as they are broadly diversified and retain some of the characteristics of a broad global benchmark. More-narrow exposures might also be considered as single-stock substitutes for those investors looking to express a view on a theme but who lack the time, tools, and inclination to conduct due diligence on individual companies.”
For more thematic investment strategies, visit our Thematic Investing Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.