Thematic Investing with ETFs

Thematic investing and ETFs go hand in hand. Here’s a quick overview of what both entail so you can get started on a theme-led trading or investing strategy.

A look at ETFs and Thematic Investing

What are ETFs?

ETFs are exchange traded funds, a financial product that combines the properties of a funds and equities.

Each exchange traded fund is composed of different assets grouped together. These might be equities, commodities, bonds, or a mixture of all of them. The assets inside an exchange traded fund track the performance of the fund’s underlying market as closely as possible.

An ETF vs an Index fund

There are some similarities between the pair, but ETFs and index funds do hold some key differences. Here’s a very quick outline of what separates the two.

  • ETFs can be bought and sold at any time, whereas index funds are only available at the price set at the end of the trading day.
  • Exchange traded funds generally require lower minimum investment
  • ETFs are typically more tax efficient

For retail investors and traders, an ETF may be the better option, but this of course all depends on individual goals, personal capital expenditure and so on.

Do ETFs pay dividends?

That depends on the type of ETF. An income fund will distribute any interest and dividends back directly to you, as the name suggests.

An accumulation fund, on the other hand, will not pay a dividend. Instead, it will reinvest any accrued gains back into the fund, raising the value of your investment.

Both are valid options, but again it depends on what you are trying to achieve when investing or trading an ETF.

How does thematic investing apply to exchange traded funds?

The beauty of ETFs is that they are perfectly suited to a thematic investing strategy.

By their very nature, they group together specific assets into one product. They offer exposure to trends, industries, technologies and sectors all in one product – ideal for those who do not want to do they analytical legwork associated with other forms of investing and trading.

One thing in common with thematic ETFs is that they tend to be forward-facing. Many of the available funds out there focus on disruptive technologies and trends.

For instance, cryptocurrency and bitcoin is huge business right now, as one of the most popular trends amongst millennial investors. If this piques your interest, you may want to invest in a crypto-themed ETF.

A space travel-focussed ETF will cover numerous assets around space exploration, i.e. companies that offer commercial space flight, rocket engine manufacturers, raw materials suppliers, and so on.

Cathie Woods’ ARK series of technology-driven ETFs are the perfect example of themed funds. Each is split into different niches and ideas based around disruptive technologies:

  • Innovation
  • Fintech innovation
  • Autonomous technologies & robotics
  • Next generation internet
  • Genomic revolution

So, for example, the fintech innovation fund is based on “innovative and disruptive financial technologies.

“Companies represented within ARKF transaction innovations, blockchain, risk transformation, frictionless funding platforms, customer-facing platforms, and new Intermediaries”.

By packaging assets in the fintech space together into a single tradable asset, investors in that ARK ETF would be gaining exposure to multiple assets and mitigate their single stock risk.

How popular are thematic ETFs?

Very. In Europe alone, thematic ETFs attracted a record €9.5bn in new assets across 2020, bringing the total assets under management (AUM) for thematic funds up to €22.7bn – an all-time high.

In the US, thematic ETFs AUM stands at $183 billion, according to Global X’s Q1 2021 thematic investing report. That represents 2% of the US’ total ETF sector, but, crucially, 7% of revenue. That may look small, but growth has been massive.

Global X reports that US thematic exchange traded funds’ assets under management has risen 430% since Q4 2020. The volume of inflows has tripled since 2019. Aggregate AUM reached $133.1bn at the end of Q1, up 28% from the $104.1bn AUM achieved at the end of Q4 and exceeding the broader US ETF industry’s 7% q/q gain.

There are now 163 thematic exchange traded funds listed on US exchanges – an increase of 13 over Q4 2020. None have been closed either.

In terms of returns, we can look at the performance of some European ETFs to see what makes them a popular choice for retail investors. Some of the funds with the highest ROI include:

  • iShares Global Clean Energy ETF (INRG) – 120%
  • WisdomTree Cloud Computing ETF (WCLD) – 92%
  • VanEck Vectors Video Gaming and eSports ETF (ESPO) – 68%

Risks of thematic investing with ETFs

As with any financial product or asset, the value of an ETF can rise or fall. As such, you can lose money, so only invest or trade if you are comfortable with any potential losses.

There are risks around liquidity too. A surge in investor interest in a specific sector may cause a rally in a fund’s underlying index or component assets. If this is the case, investors may start selling their holdings, and trigger a liquidity shortage. The fund would have to be rebalanced accordingly to protect against this.

As ever, due diligence and research are important here. Make sure you do yours before committing any capital.

Attention shifts to bond yields as stocks rally, ARKX ETF launch, Deliveroo IPO priced at the bottom

Morning Note

Despite some volatility in individual names associated with the Archegos Capital fallout, chiefly the big banks that had acted as prime brokers to the hedge fund, there was no broad selloff in blue chips. The Dow Jones industrial average wiped out a 160pt loss at one point to finish 98 points higher for a fresh record close, while the S&P 500 and Nasdaq were flat. The DAX notched a record high, whilst the Euro Stoxx 50 hit its highest since the pandemic. European stock markets are broadly higher this morning, with the FTSE 100 eyeing 6,800 again with all sectors but healthcare in the ascendancy. The DAX made a fresh all-time high again. Banking shares in Europe are higher – shrugging off the Archegos episode as yields are on the move higher. Even CS is 1% higher this morning.

Market participants will be glad to see this has so far been contained – though there may be some more trades related to Archegos that need unwinding. Banks left holding the bag – which look to be Nomura and Credit Suisse more than others – will suffer significant losses. Goldman Sachs, surprise, surprise, seems to have escaped cleanly by acting swiftly and decisively to get out first. So far though there has not been a big unwind across assets.

Attention quickly turned to the bonds as the US 10-year yield jumped to 1.76% this morning, towards the top of the recent range. This helped lift the dollar to its highest since November, with the dollar index hitting 93. Gold fell to the bottom of the recent range to test $1,700 again – key trend and Fib support coalesces around $1,690 should the round number go. Bitcoin climbed to $58,000 say Visa offered more ‘corporate support’ by saying it would allow the use of the stablecoin USD Coin to settle transactions on its payment network. WTI (May) eased back from $62, the highest in a week, ahead of the OPEC+ meeting this week at which producers seem all but certain to maintain supply curbs through May.

Deliveroo is pricing its IPO at the bottom of the range, with shares off at £3.90 and valuing the company at £7.6bn. Still it’s the biggest London listing in a decade so it should get plenty of interest once the stock opens for unconditional trading next week. The IPO has not has been as warmly received in the City as found Will Shu might have expected. Numerous funds including giants Aviva, Aberdeen Standard and Legal & General are not taking part amid various concerns about governance (dual class shares), working practices (riders getting £2 an hour) and regulatory concerns. It’s also true to say that the path to profitability remains questionable.

Cathie Wood’s Space ETF – ARKX – is due to start trading today. The first new ETF in two years from the Wood stable is eighth in total. There are several eye-catching elements to the ETF’s holdings.

First, the holdings, which are not aligned very closely to existing space-focussed funds like the Procure Space UFO ETF. Somewhat amazingly, the second biggest holding in the ETF, at more than 6% weighting, is – get this – another ARK ETF, the 3D Printing ETF (PRNT). Loading up ETFs with other ETFs – which you are promoting – seems kind of wrong. You could rightly ask: is it a pyramid? It smacks of the 1920s American experience of the Goldman Sachs Trading Corporation, which in turn set up the Shenandoah Corporation, also an investment trust, which in turn set up Blue Ridge Corporation. Yes, another investment trust. What you had was a lot of trusts with the same people and same investments – cross-investing in one grand pyramid scheme. We all know how that ended up.

Second, it contains a number of names that are not associated with ‘space’. For instance, JD.com is a 5% holding, whilst Virgin Galactic is less 2%. Netflix is a 1.27% holding. True, the prospectus makes it clear that ‘space’ investments would only ever be no less than 80% of holdings, but it is nonetheless noteworthy to package up a load of investments in this way.

And, ARK has changed the language in its ETF prospectuses to remove the limits on single-company exposure. It also added a reference to blank-check companies (SPACs) to the risk section. This will only add to concerns about the concentration in large cap momentum stocks and exposure to high risk SPACs comes with its own set of worries for investors.

Constiuents of the ARKX space exploration ETF

A light calendar for data today – just the US CB consumer confidence report on tap as well as preliminary German inflation numbers. Fed speakers Williams and Quarles are up, too.

Fed governor Christopher Waller offered a robust defence of the central bank’s policy making, refuting suggestions it is keeping rates low to finance government debt. That is one in the eye for MMT supporters. US total government has risen $4.5 trillion, about 20%, since March 2020. In many ways the pandemic brought MMT from the theoretical shadows to the de facto limelight without any debate. However, the Fed is seeking to assert its independence and rejected the idea that the central bank is working in concert with the government to directly finance debt.

“My goal today is to definitively put that narrative to rest. It is simply wrong,” Waller said in prepared remarks to the Peterson Institute for International Economics. “Monetary policy has not and will not be conducted for these purposes.” We shall see.

Cryptocurrency update: Visa & Cathie Woods support BTC as currency goes green

Bitcoin gets a lot of support this week. Visa’s decision to allow crypto payment settlement, plus Cathy Woods highlighting its potential, helps prices jump. Elsewhere, a greener future for BTC mining could be on the way.

Cryptocurrency update

Visa gives go-ahead to cryptocurrency payment

They just keep on coming. Institutional support for digital currencies strengthened on Monday 29th March as Visa said it will now allow payments to be settled via cryptos.

The credit card giant said it will allow the use of USD Coin to settle transactions on its payment network.

The USD Coin (USDC) is a stablecoin cryptocurrency whose value is pegged directly to the U.S. dollar.

“We see increasing demand from consumers across the world to be able to access, hold and use digital currencies and we’re seeing demand from our clients to be able to build products that provide that access for consumers,” Cuy Sheffield, head of crypto at Visa, said.

Before this change, if a customer wanted to use cryptocurrencies to make a transaction, using a Crypto.com Visa card, the digital currency held in a cryptocurrency wallet needs to be converted into traditional money.

Visa’s latest step, which will use the Ethereum blockchain, strips out the need to convert digital coin into traditional money in order for the transaction to be settled.

This is the latest in a wide range of institutions and finance companies throwing their weight behind cryptocurrencies. The ever-present Elon Musk has said you can now buy Tesla cars using Bitcoin, and the likes of BNY Mellon, BlackRock Inc and Mastercard Inc have embraced some digital coins too.

Visa’s move has caused a jump on Bitcoin. BTC is now trading around $57,000, growing from the $55,000 levels seen last week.

Cathie Woods bullish on BTC

Speaking of institutional support, Cathie Woods is flying the flag for BTC, highlighting the token’s massive potential in a recent CBOE panel.

With surging prices, Bitcoin’s total market cap reached over $1 trillion. Woods, however, thinks this is just the tip of the digital iceberg.

“If we add all of the potential demand relative to the limited supply, we come up with incredible numbers over the long term. We have just begun. One trillion dollars is nothing compared to where this ultimately will be,” Woods said.

With institutional support rising, firms are starting to hoard digital tokens, taking millions out of general circulation. Putting a squeeze on the supply of tokens that will only ever have limited supply anyway, could help support prices.

Wood also commented on major tech companies adding Bitcoin to its balance sheet, and Tesla’s recent move to accept Bitcoin payments: “We’ve seen Square do this, Tesla do it, MicroStrategy’s put, I mean, it’s defining its business around it now. And one of the reasons, as Tesla announced yesterday, is it would like to do business in Bitcoin in regions of the world… where conversion from one fiat to another is prohibitively expensive.”

Woods is a pioneer of adapting investing to an increasingly digital world. Her ARK ETFs are helping people invest in various forward-looking industries. Her support and enthusiasm for BTC should come as no surprise, but with her lead, others may follow.

“Green Bitcoin” on the way?

Argo Blockchain, based in London, has confirmed that it has signed a Memorandum of Understanding (MoU) with DMG Blockchain Solutions to launch the first Bitcoin mining pool powered by only clean energy.

The project, Terra Pool, is expected to reduce the impact of Bitcoin mining on the environment, creating the first ‘green Bitcoin’.

Peter Wall, Argo Blockchain Chief Executive, said: “Addressing climate change is a priority for Argo and partnering with DMG to create the first ‘green’ Bitcoin mining pool is an important step towards protecting our planet now and for generations to come.

“We are hopeful other companies within the Bitcoin mining industry follow in our footsteps to demonstrate broader climate consciousness.”

According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin mining, i.e. the process of creating new Bitcoins via complex algorithms, uses more electricity than Argentina. Anything to help mitigate its environmental impact should be a welcome move, especially if digital currencies are the future of finance. Sustainability is the watchword.

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