How investors woke up to growth potential of thematic ETFs

CIO says many concepts have proven to be foundational elements of the economy through lockdown

How investors woke up to growth potential of thematic ETFs

Investors have woken up to the concepts and growth potential in many thematic ETFs, which have taken centre stage thanks to their resilience in the face of a devastating pandemic.

Elliot Johnson, CIO at Evolve ETFs, told WP that many advisors and retail investors have realized that a lot of these themes have not only thrived during lockdown but have proved to be foundational elements of the economy.

It’s something that has resulted in significant growth for the three-year-old firm, with assets now hitting the $1.5 billion mark. In particular, its thematic funds have excelled during this work-from-home period, including the Evolve Automobile Innovation Index Fund (CARS), which focuses on autonomous vehicles, Evolve Cyber Security Index Fund (CYBR), Evolve Innovation Index Fund (EDGE), which includes cloud computing, robotics and AI firms, and the Evolve E-Gaming Index ETF (HERO).

Of course, no one predicted COVID-19 but that, said Johnson, is exactly the point. These funds were put together over a period of time and the trends have not changed direction but accelerated because of lockdown.

Evolve has seen growth across the board, particularly from individual investors, and the CIO believes the pandemic’s effects have separated the economy.

He said: “We’ve seen exactly how resilient digital products have been, whether it’s physical things in the digital world, like Amazon, or whether it's all the electronics we're using all day long; everything from cloud computing, to cybersecurity, to video gaming, and so on.

“That’s got noticed by investors who have realizing that, actually, there's a lot of growth there that maybe they're not exposed to.”

With the FAANG stocks making up about 46% of the NASDAQ and almost 25% of the S&P 500, passive investors who buy the indices are hugely concentrated. Johnson believes many people’s eyes have been opened to the fact there is so much more going on in the tech sector, which is not represented by these names.

He added that investors are becoming sophisticated and want the tech umbrella to be split into more descriptive categories. For example, a genomics company that uses Big Data science to map the human genome to find drug therapies ... are they a tech company? Not really. Are they a healthcare company? Yes, but not the same as the big healthcare companies that are more about patent portfolios and large scale manufacturing. Big bucket categories are simply not relevant anymore, Johnson said.

“Tech has grown to eat more and more industries because data is the sort of central resource that's changing the world,” he said. “And that's kind of the basic thesis behind a lot of our products.”

Investors get it, he added, because they see it in their lives, especially during lockdown when everyone has had to get more digital, whether they like it or not. The big question now is whether these trends stay resilient as things get back to “normal”, whenever and however that might be.

Johnson believes that this process will be gradual but that history will reveal this moment to be a genuine shift in our society.

He said: “I think people are going to talk about pre-COVID and post-COVID and notice that the world has changed, and that in some cases, some of the changes will stick.”

Wider acceptance of working from home and being connected in various locations will mean an increase in cloud computing and, therefore, an even bigger role for cybersecurity – themes that Evolve has found to be durable in their funds. This will mean everybody has devices and can go anywhere, which was a model that was emerging but has now been turbo charged, and won’t slow down.

Johnson said: “Gradually, as we go back to ‘normal’, these new things will just be part of our toolkit of things we do with our lives. Maybe we will actually reach more of that work-life balance that has been promised to us for the past 20 years.”

He added: “In our business, it's now more comfortable for us to communicate with potential business partners in the U.S. or in Europe, or other parts of the world, because talking to somebody in New York CIty on a video call is exactly the same as talking to somebody on a video call in Toronto.

“By shrinking the world like that, it’s amazing for business because the psychological friction that was there about not wanting to do business with somebody if you can't see them in person, some of that just falls away entirely. And that's pretty exciting.”