Industry expert tells WP many thematics are set to thrive during the 'reopening economy'
Thematic ETFs remain a drop in the investable universe but 2020 saw a rise in areas that surged in pandemic conditions. In the U.S., the likes of cloud computing, gaming or e-commerce propelled assets to about $100 billion as our lives changes and trends accelerated.
Jay Jacobs, head of research and strategy, Global X, told WP that, for advisors, as well as being a legitimate allocation of your client’s portfolio, the discussion around thematics can resonate with them and make investing more relatable to real life.
He said: “This is a great conversation to have with clients. Some things just resonate better with clients than others. It’s hard for a value investor to explain what they’re doing to an end client, or explain low volatility risk management or tactical management. It doesn't feel very tangible; it seems like something that was on a spreadsheet.
“But thematic investing is something you see happening in real life. We're having a conversation [with WP] about cloud computing; I'm sure many financial advisors or clients ar having Zoom meetings throughout the day, or using some other cloud computing technologies. It’s an investment philosophy that really resonates with the end investor and can help not just investments and hopefully long-term returns, but also help in relationship-building.”
Thematic investing, of course, is not new. Global X, for example, has been doing it for more than a decade, with its first thematic ETF focused on lithium and battery technology. Essentially, Jacobs said, it’s simply about looking ahead at long-term trends and trying to identify companies you think will benefit.
What was almost exclusively institutional has, however, become democratized through ETFs. Anyone from a Norwegian pension fund to a mom and pop investor on their self-directed brokerage account can access the same strategy. In 2020, this became even more apparent.
“We saw a huge divergence in the economy because of the pandemic,” Jacobs said. “And we saw that some segments of the economy did extraordinarily well and some segments of the economy did really terribly.
“It was not aligned with traditional ways of thinking about the economy. It wasn't based on sectors, not on asset classes necessarily, and it wasn’t even based on geography so much. It was really based on what is the type of business that these companies are running?
“Is it a digitally enabled business, like cloud computing, or e-commerce or video games and e-Sports? Those companies did fantastically well because people were at home and they had an internet connection, and that was pretty much their only access to the outside world.”
Firms that focused on having a physical presence and needing physical contact with people are suffering, of course, creating a digital versus physical divide. This taps into thematic investing’s core principle of high-growth potential.
For thematic believers, Jacob offered encouraging words for the future. For those carving out 10% of their equity portfolio for long-term, slightly more volatile thematic growth, he believes many of the trends that have exploded during lockdown will continue because we’ve started to see structural change in the economy. For example, many millennials expect to work from home more, while many business expect to cut back on travel. Scores of folk will carry on doing their groceries online.
The pandemic, therefore, is a catalyst for long-term change in how people conduct their everyday lives. Global X carried out research on the "reopening economy", which is differentiated from the "stay-at-home economy". The reopening, essentially, is about balancing economic growth with safety, and looking at the areas positioned for safety and flexibility.
Jacobs said: “If you look at the genomic space as a theme, that's been critical to the pandemic. Since the beginning, all the testing and vaccine development had a lot to do with genomic sciences and the field of genomics.
“When they’re trying to reopen the economy, or have NFL players and basketball players tested every two days, that’s really an acceleration of the genomics theme. And we're not just seeing it in sports, we're seeing it in universities, we're seeing it in certain businesses that need people to show up to the processing plants or factories.
“We’re also seeing the Internet of Things. We're tracking people for proximity, and taking temperatures and monitoring data on people's wrists to understand that they might be exhibiting signs of COVID-19. There's just a couple of themes that are more uniquely suited to this weird, tenuous reopening environment that we think are going to be accelerated.”