The world is changing quickly. Technology seems to be advancing at lightspeed, as areas like artificial intelligence, 5G wireless technology, and autonomous vehicles no longer just exist in science fiction or research labs, but have entered our daily lives. People are changing too. Our preferences are shifting to favor shopping online instead of in stores, and to use social media to connect with friends, rather than in-person events. New medical treatments, diets, and approaches to wellness are enabling longer, healthier lives. Of course, our relationship with our planet is evolving as well, as climate change and demands for physical space and natural resources place new pressures on Earth.
Shrewd investors may recognize that these powerful structural changes can be either feared or embraced; they present risks to established companies who benefitted from the ‘old way’ of doing things, but may also offer fantastic opportunities to those who are leading in establishing these new paradigms. But how does one decipher what’s a powerful disruptive theme from a short-term fad? And how can one determine the likely winners and losers of such changes?
This is where thematic investing comes in. Thematic investing seeks to bring a rigorous, research-driven approach to help best position a portfolio for an uncharted era. It is the disciplined process of identifying powerful macro-level trends and the companies that stand to benefit from the materialization of those trends.
Thematic investing is not new. Some put the emergence of the modern version of thematic investing around 15-20 years ago, led by sophisticated institutions with access to global markets and astute research teams. At Global X, we launched our first thematic exchange-traded fund (ETF) eleven years ago, in 2010.
But the pace at which change is occurring seems to be accelerating, necessitating a greater imperative to embrace disruption, rather than fight against it. This became evident during the COVID-19 pandemic. Consumers had no choice but to shift from brick-and-mortar to e-commerce; from daily commuting to cloud-based remote work or learning; from attending live events to video games and social media. The accelerated adoption of these themes coincided with impressive returns and record assets flowing into thematic funds. Between December 31st 2019 and March 31st 2021, total assets under management (AUM) in thematic funds worldwide (inclusive of both mutual funds and ETFs) tripled from $195 billion to $595 billion (USD) over this 15-month period, according to Morningstar.
Despite strong recent returns and record inflows for several themes, we believe we are still just at the tip of the iceberg for thematic investing. Many themes accelerated by COVID-19 still remain in their relative infancy, and investors systematically incorporating thematic approaches in their portfolios remains in its early days.
For Canadians in particular, there are several reasons why we believe now is the right time to consider adopting a thematic approach to one’s portfolio.
- Enhance Growth: Over the past two decades, the average annual GDP growth has been 2.3% in Canada and 1.8% in the US. Structural challenges like aging populations and high debt loads mean this growth is unlikely to accelerate over the long term. With generally high equity market valuations, we anticipate investors will struggle to achieve meaningful long-term growth with broad market indices. More targeted thematic investments, however, can help laser-in on high growth opportunities.
- Expand Beyond Canadian Borders: Canadians tend to have certain biases in their portfolios including being overweight Canadian stocks. Thematic investing, however, takes an unconstrained approach to finding opportunities, rejecting rigid geographic or sector definitions. By incorporating themes into one’s portfolio, Canadian investors can potentially diversify their returns by gaining exposure to Japanese robotics stocks, European FinTech platforms, or e-commerce giants in Latin America, for example.
- Avoid Being Disrupted: Associated with Canadians’ home country bias, many of us are overweight domestic industries like oil. Yet this industry is at risk of disruption as electric vehicles and CleanTech threaten to upend fossil fuel usage in pursuit of reaching carbon neutrality. Rather than risking losses as this disruption occurs, investors can potentially get ahead of the trend by embracing companies developing these technologies in their portfolio.
- ETF Choice: Thematic ETFs often track indices that select dozens of stocks associated with a particular theme, while the ETF wrapper provides a one-ticket solution to access those companies. Canadian investors have a unique vantage point where they can invest in both domestically listed and U.S.-listed thematic ETFs. Between the two markets, there are currently well over 200 thematic ETFs available. The flipside of choice is that the burden is placed on investors to find the best solution for their needs. The table below lists what we believe are important considerations when evaluating a potential theme.
At Global X, we put a strong emphasis on research. While there are numerous approaches to thematic investing, depending on the asset manager or investor, we are confident that Global X’s in-depth, research-driven approach meets the challenges of thematic investing head-on, while offering efficient and precise solutions to investors. If you are a Canadian financial professional interested to learn more, please reach out at Canada@globalxetfs.com