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Myth-Busting Six Misconceptions about Thematic Investing

Global X ETFs

Contributor:
Global X ETFs
Visit: Global X ETFs

By:

Head of Research & Strategy

In this piece, we seek to respond to six commonly held misconceptions about thematic investing, sharing data, analyses, and academic theories to reveal the truth behinds these myths.

Myth #1: Thematic Investing Is Easy

Rather than making a subjective and generalized statement about whether thematic investing is ‘easy’ or ‘hard’, we believe it’s most helpful to share our approach to thematic investing to convey the rigor of our process. 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.

In our view, there are broadly three stages to thematic investing, each with several sub-steps:

1. Theme Identification: identifying a powerful structural theme that is expected to disrupt major segments of the global economy

2. Methodology Development: establishing a repeatable process to accurately and comprehensively identify and weigh the companies well-positioned to benefit from the materialization of the theme

3. Ongoing Analysis: constantly monitor the theme to determine how it is evolving over time and make adjustments as necessary

For theme identification, we start by maintaining a ‘thematic universe’ of approximately 70 themes suggested by financial firms, consulting groups, futurists, and other organizations. We evaluate and re-evaluate each these themes across dozens of dimensions that broadly fall into the categories of Conviction, Investability, and Time Horizon. For example, to determine our Conviction for a specific theme, we consider assessments of the theme’s total addressable market, how much of that market has already been penetrated, short- and long-term catalysts, and potential pitfalls. If it’s a technology-oriented theme, we may further consider the current state of the technology, whether there is a path to profitability, and if there are co-dependencies on the emergence of other technologies, among several other factors. For Investability, we run an analysis of the potential opportunity set of companies with high exposure to the theme, and further evaluate dynamics like upcoming IPOs, private companies, and venture capital trends. Last, in Time Horizon, we consider estimates for how quickly the theme may play out, based on historical and anticipated adoption patterns.

After identifying a powerful theme, we move to the Methodology Development stage. Working with an index provider, we can spend roughly 6 months fine-tuning an index methodology to create a repeatable process that accurately captures companies that we believe will benefit from the materialization of a theme. This requires defining the scope of a theme, such as each of the sub-themes that are involved and relevant sectors and industries. It also requires a close examination of potential companies to ensure they meet strict thematic purity levels based on their percentage of revenue or assets. And it further means assessing different weighting schemes, liquidity thresholds, rebalance schedules, and IPO inclusions, to ensure a well-designed and liquid basket.

Once the theme is identified and a methodology developed, ongoing analysis spans the entire lifecycle of a theme, often decades. The goal of this ongoing analysis is to monitor, anticipate, and react to potential changes in the theme, including changing drivers or risks, and an evolving opportunity set of companies, fluctuating valuations and fundamentals, and other dynamics that impact the theme’s trajectory.

Our goal at Global X is to make thematic investing as seamless and rewarding for investors as possible. Our diligent approach to Theme Identification seeks to curate a list of powerful themes for investors. Our Methodology Development efforts with index providers seeks to ensure the exposures remain pure and relevant throughout the life cycle of a theme. And our Ongoing Analysis and freely available research is designed to optimize our themes over time and assist investors with their own monitoring efforts, so they can make informed decisions about potential entries and exits.

Not all investors and asset managers take the same approach to thematic investing. Indeed, some may opt for a less rigorous approach, but in our experience at Global X, thematic investing is anything but easy and we embrace the challenge.

Myth #2: Thematic Investors Are Mostly Self-Directed Retail

The recent attention on certain investment-focused internet message boards and other social media channels highlighted that self-directed retail investors are an active and impactful constituency. The rise of ETFs, as well as zero-commission trading at many brokerages, has played a meaningful role in leveling the playing field and empowering self-directed retail investors to efficiently access strategies previously limited to sophisticated institutions, including thematic investing, but also other areas like alternatives, smart beta/factor investing, currency hedging, and more.
There is a common narrative that thematic investing is dominated by self-directed retail investors. This assumption likely stems from the relatability of thematic investing. People often assume that retail investors tend to ‘invest in what they know’ and a theme like electric and autonomous vehicles is likely more familiar to a retail investor who has seen or owns a Tesla, compared to a quantitative investment strategy developed by a team of PhDs.

Yet data suggests that this assumption is exaggerated. In 2020, assets from self-directed online platforms represented just 33% of US net new assets into our thematic growth family of ETFs, which saw more than $2.6B in inflows over that time frame.1 Other channels, including financial intermediaries (wirehouses, registered investment advisors, and independent broker dealers), played a much larger role, driving 52% of inflows. The balance, 15%, came from institutional investors, demonstrating that interest in thematic investing spans a range of investor types, and is not dominated by retail investors.

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Related ETFs

GXTG: The Global X Thematic Growth ETF seeks to provide broad exposure to structurally disruptive macro-trends through a portfolio of ETFs selected from the Global X Thematic Growth family.

BOTZ: The Global X Robotics & Artificial Intelligence ETF seeks to invest in companies that potentially stand to benefit from increased adoption and utilization of robotics and artificial intelligence (AI), including those involved with industrial robotics and automation, non-industrial robots, and autonomous vehicles.

CLOU: The Global X Cloud Computing ETF seeks to invest in companies positioned to benefit from the increased adoption of cloud computing technology, including companies whose principal business is in offering computing Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), Infrastructure-as-a-Service (IaaS), managed server storage space and data center real estate investment trusts, and/or cloud and edge computing infrastructure and hardware.

DRIV: The Global X Autonomous & Electric Vehicles ETF seeks to invest in companies involved in the development of autonomous vehicle technology, electric vehicles (“EVs”), and EV components and materials.  This includes companies involved in the development of autonomous vehicle software and hardware, as well as companies that produce EVs, EV components such as lithium batteries, and critical EV materials such as lithium and cobalt.

FOOTNOTES

1. Global X ETFs, data from Jan 1, 2020 to Dec 31, 2020
2. Global X ETFs, as of Jan 31, 2021
3. AltaVista, as of Feb 9, 2021
4. Bloomberg, data from Jan 1, 2020 to Dec 31, 2020.
5. Bloomberg, Global X ETFs, as of Jan 31, 2021.

Originally Posted on February 22, 2021 – Myth-Busting Six Misconceptions about Thematic Investing

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