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How to invest in thematic ETFs

Be it electric vehicles or biotechnology, cybersecurity or eSports, thematic ETFs provide investors with exposure to a number of exciting megatrends.

How to invest in thematic ETFs

What is thematic investing?

As the world around us is in a constant state of flux, there is a dynamic landscape of opportunities for investors. Be it a disruptive technology that will transform an industry or a shift in consumer behaviour; thematic investing provides exposure to exciting new macro trends. To put it simply, thematic investing aims to anticipate a structural change in society or business, and capitalise on it.

The forward-looking nature of thematic investing stands in sharp contrast to more widely used strategies, such as cyclical or value investing. Thematic investors are typically driven by the potential for growth. On the other hand, investors may also use this strategy to close portfolio gaps or hedge against long-term risks. For example, an oil company employee may invest in electric vehicles and clean energy companies to hedge the risk of reduced revenue from traditional energies due to declining demand.

How do you invest in future trends with ETFs?

There are two paths investors can take in thematic investing: buying individual companies or buying thematic exchange-traded-funds (ETFs). Pinpointing individual stocks with high exposure to a theme requires time for research and sometimes access to international markets that may be unavailable to individual investors (as some themes are global in nature).

Yet with the invention of ETFs, retail investors can access dozens of companies around the world with a single trade. Many businesses in new innovative sectors are often untested and can be a risky addition to a portfolio on their own. Yet ETFs help investors to spread their risk across many different companies in a sector, and therefore provide an advantage over try to pick one industry winner. What’s more, ETFs are typically low-cost with a small annual management fee.

You can invest in the ETFs listed below from just £3 with our ETF platform.

Clean energy and electric vehicles (EV) ETFs

As concerns around climate change grow, the shift away from traditional power generation seems inevitable. The clean energy sector, which covers solar energy, hydrogen and battery solutions, will be the main benefactor from this shift towards more sustainable energy sources. As societies transform the way they power themselves, thematic ETFs in this space will give investors exposure to this potentially lucrative trend.

Meanwhile, falling costs and increased production of lithium-ion batteries along with government-led incentives to cut CO2 emissions has helped to drive growth in the electric car market. While Tesla may have sparked the electric vehicle (EV) mania, more carmakers are jumping on the bandwagon, partly to comply with increasingly stringent regulations in Europe and China. With legacy companies such as Mercedes, BMW, Ford, GM, Jaguar Land Lover, Volvo, and many more, all setting ambitious, public targets for EV production, the industry is gaining momentum. In its recent outlook, the IEA predicts that the global EV stock is set to expand from over 11 million vehicles in 2020 to almost 145 million by 2030, an annual average growth rate of nearly 30%.

There are a number of ETFs retail investors can invest in to gain exposure to the clean energy sector. One example is iShares Global Energy UCITS ETF (INRG) which tracks the S&P 500 Global Clean Energy Index. INRG currently invests in 82 companies that are involved in clean energy-related businesses.

Another index to pay attention to is Solactive Battery Value-Chain index, which tracks providers of energy storage technology such as and mining companies which produce the metals such as lithium which are used in battery manufacturing. Investors can track this index through L&G Battery Value-Chain UCITS ETF (BATG).

Table 1: ETFs for the clean energy sector

Code Holdings Annual fee
iShares Global Energy UCITS ETF INRG 82 0.4%
L&G Clean Energy UCITS ETF RENG 57 0.49%
iShares Electric Vehicle and Driving Technology UCITS ETF ECAR 81 0.4%
L&G Battery Value-Chain UCITS ETF BATG 34 0.49%

Automation and robotics ETFs

Robotics and automation is a rapidly emerging theme that is fuelled by significant economic incentives. Demographic challenges and aging population may result in a shrinking workforce, while rising labour costs pose automation as a more cost-efficient alternative. Desire for better performance drives the trend too, especially as technologies develop. Plus, during Covid-19 pandemic automation has helped to limit human-to-human interactions.

Enamoured with computer vision, mobility and end-of-arm tools for grabbing objects, robots can take an increasing work-burden on their shoulders. They can disrupt various sectors – from manufacturing and transportation to medicine and agriculture. One of the success stories has been a UK retailer-slash-technology company Ocado, which is now part of ROBO Global Robotics and Automation Index. The firm has developed an automated warehouse, where packing robots are collecting items ordered by the customer.

Table 2: ETFs for the automation and robotics sector

Code Holdings Annual fee
iShares Automation and Robotics UCITS ETF RBTX4 124 0.4%
L&G ROBO Global Robotics and Automation UCITS ETF ROBG 83 0.8%
Digital Infrastructure and Connectivity UCITS ETF DIGI 79 0.69%
HAN-GINS Tech Megatrend Equal Weight UCITS ETF ITEK 113 0.59%

Healthcare innovation and biotechnology ETFs

An ageing population and rising healthcare costs are helping drive greater innovation in the healthcare industry. Digital healthcare platforms such as the UK’s Babylon or Teladoc in the US allow providers to advise their patients within a mobile app. Mental health is also increasingly shifting online, with Teladoc’s BetterHelp providing all-you-can-text therapy from the comfort of your own couch. The Covid-19 pandemic has accelerate these changes, with both doctors and patients now realising the added benefits of telemedicine - convenience, time, and lower costs.

The pandemic has also given a rise to the biotechnology – a science-driven industry that focuses on novel break-through drug research and development. Firms were faced with tremendous opportunities and challenges to develop potential treatments and vaccines for Covid-19, with some winners such as BioNTech emerging from the pandemic.

Table 3: ETFs for the health-tech and biotech sectors

Code Holdings Annual fee
iShares Healthcare Innovation UCITS ETF HEAL 135 0.4%
L&G Healthcare Breakthrough UCITS ETF DOCT 82 0.49%
iShares NASDAQ US Biotechnology UCIT ETF BTEC 273 0.35%
iShares Ageing Population UCITS ETF GBP AGED 297 0.4%

Video gaming and eSports ETFs

The market for esports – competitive video gaming as a form of spectator entertainment – is expanding rapidly, with platforms like Amazon-owned Twitch broadcasting to 140 million monthly active users. Strange as it may sound, the coverage of others playing video games is gaining popularity, especially amid social distancing conditions created by coronavirus. According to Statista, by 2024, there are expected to be over 577 million eSports viewers worldwide, a huge increase from 397 million in 2019.

Be it game publishers and developers, streaming platforms, or gaming hardware producers, the companies in the industry are set to capitalise on the emerging popularity around game viewing. These firms can earn money through merchandise sales, broadcast licensing deals, live-event tickets, sponsorships, advertising, or they can sell exclusive rights to operate eSports teams.

Table 4: ETFs for the health-tech and biotech sectors

Code Holdings Annual fee
Vaneck Vectors Video Gaming & eSports UCITS ETF ESPO 25 0.55%
Global X Video Games & Esports UCITS ETF HERU 39 0.5%

Cybersecurity ETFs

The concerns about cybersecurity have risen rapidly amid the pandemic. In recent months, high-profile cyber attacks have seen Zoom meeting rooms hacked, and EasyJet customer details stolen. Facebook is known for numerous data leaks, with the most recent incident seeing personal data of over 500 million users posted in a low-level hacking forum.

From a business perspective, cyber-attacks – whether in the form of sensitive data theft, or simply taking down a firm’s website – could lead to enormous damage. As the world becomes increasingly digitalised, businesses and people are demanding better data and consumer protection. That’s good news for the cybersecurity sector.

Table 5: ETFs for the health-tech and biotech sectors

Code Holdings Annual fee
L&G Cyber Security UCITS ETF ISPY 57 0.75%
Rize Cybersecurity and Data Privacy UCITS ETF CYBR 50 0.45%
First Trust Cybersecurity UCITS ETF CIBR 40 0.6%

Risks around thematic ETFs

Some of the risks surrounding thematic ETFs are liquidity concerns due to high concentration. Following the surge in investor interest in sustainability, BlackRock Clean Energy ETFs, which track S&P 500 Global Clean Energy index, saw combined assets surge from $760 million to $10.8 billion in less than a year. This has caused a large rally in the index and the underlying companies, particularly its small-cap components. PlugPower, for example, saw its shares jump nearly 2000% from the start of 2020 to its high in January 2021. If S&P DJI did not intervene to diversify the index, there could have been a liquidity shortage if investors had started to sell their holdings.

On the other hand, by diversifying the index composition from pure-play companies to a broader range, investors may lose out on the purity of exposure to a chosen theme. It is therefore a balancing act for investors to decide how diversified or concentrated they want their portfolio to be. No matter how attractive a theme or an ETF look from the surface, due diligence and research are what defines an intelligent investor.

How to invest in thematic ETFs with IG

  • Open an IG in minutes, choosing a share-dealing account type. You can add an ISA account in the My IG Dashboard area.
  • Fund your account
  • Search for the thematic ETF you wish to buy. We have included some examples in the tables above.

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Publication date : 2021-05-26T08:39:00+0100

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