Finding the ingredients of thematic ETF success

A sound economic impact, investablity, and longevity are necessary — but not surefire — predictors of a winning fund

Finding the ingredients of thematic ETF success

In the world of investing, it’s hard to deny the appeal of thematic strategies. With a compelling narrative and educational resources for investors and advisors, an issuer can have significant success and inflows from a thematic ETF — the operative word being “can.”

“[S]ometimes all of those positive attributes are behind a theme, and it still fails,” wrote contributor Debbie Carlson. Citing Global X Director of Research Jay Jacobs, she noted that the firm’s process for creating thematic ETFs focuses on the criteria of a theme’s economic impact, its investability, and its longevity.

Another important point, according to Amplify ETFs CEO Christian Magoon, is the “purity” of the product with respect to its theme. As an example, he noted how Google could be included in a fund that’s geared toward self-driving cars, even though the theme represents only a small fraction of Alphabet’s overall revenue.

“You hope that it becomes a bigger driver of their business, or maybe they spin it out,” he said. In the case of Amazon, he cited how the AWS Cloud has turned the e-commerce giant into the world’s largest cloud-computing company, and its earnings explain a significant chunk of Amazon stock performance.

Timing can also help, as attested by ETFMG CEO Sam Masucci. The firm’s Prime Cyber Security ETF, which trades in the US under the symbol HACK, took only a few months to pass the US$1-billion AUM mark. The first-of-its-kind cybersecurity ETF, he said, offered access to companies that weren’t part of broader technology indexes.

The fund’s launch in 2014 came as the idea of cybercrime entered mainstream consciousness. “There were a few very visible cybercrimes that really helped bring visibility to HACK, notably [involving] Target and Sony Pictures,” Masucci told As investors hunted for ETFs that provide access to sectors such as cybersecurity, the ticker name HACK easily drew their interest.

As to the question of what types of issuers tend to succeed, arguments can be raised for industry behemoths such as Vanguard or BlackRock, whose marketing and distribution machineries can quickly raise awareness and foster strong sales. But from the perspective of Jacobs from Global X, firms with a strong reputation for thematic funds can imbue a certain gravitas to a new strategy they launch.

Brandon Thomas, chief investment officer for Envestnet, contended that a first-mover status could provide a substantial edge for a well-designed and well-managed thematic ETF. “Any follow-on ETF that may try to enter the space is going to have a hard time gaining assets, particularly when the theme is a little bit more niche-y,” he said.

Of course, that’s assuming it overcomes certain challenges. Thomas pointed to thematic funds’ higher costs relative to plain-vanilla index funds, and how rival offerings with more desirable traits can steal AUM. The issuer’s distribution capabilities can also make a difference, as well as a thematic ETF’s inclusion in a widely sold asset-allocation portfolio.


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