Exchange-traded funds (ETFs) have evolved significantly from investments that track broad indexes to a plethora of theme-based plays such as clean energy, currency hedging and social media.
ETF providers regularly introduce products that reflect market trends, such as the cannabis ETFs launched in the run-up to Canada’s legalization of recreational marijuana, or the new gender-diversity products focused on companies that show a commitment to putting women on their boards and in top leadership positions. Investors are also looking for longer-term plays based on macroeconomic themes such as climate change, new technology and demographics that will transform society and business.
“Generally speaking, ETFs are a wonderful way of getting efficient, inexpensive, diversified and convenient exposure to a theme, trend or asset class,” says Noah Solomon, president and chief investment officer at Toronto-based Outcome Wealth Management Inc.
“Regardless of what you think [the next big theme] will be, you want efficient exposure to it. The best way is through ETFs, because you get to focus in a diversified way without engaging in the generally futile exercise of trying to pick winners,” he says. “You are better off being imprecisely right versus precisely wrong.”
Here are some big-picture themes for ETF investors to consider:
Technology enables us to do almost everything online these days, from banking to buying a car and booking a hotel in a far-flung locale. However, all that online activity has created a hunting ground for cybercriminals. According to Juniper Research, more than 33 billion records will be stolen by cybercriminals annually by 2023, from about 12 billion in 2018.
Companies have little choice but to ramp up their cybersecurity efforts and, in turn, that sector has become an investment opportunity. Investors will find a handful of cybersecurity ETFs on the market today, including Evolve Cyber Security Index ETF (Ticker: CYBR).
“I love this space from an investment perspective,” says Raj Lala, Evolve Funds Group Inc.’s president and chief executive officer (CEO). “Because cybercrime continues to increase, demand for cybersecurity services will continue to increase as well. It’s non-discretionary, recession-proof.”
Some other cybersecurity ETFs include the ETFMG Prime Cyber Security ETF (HACK), which is the largest cybersecurity ETF on the market, and First Trust NASDAQ Cybersecurity ETF (CIBR). In addition, Horizons Industry 4.0 Index ETF (FOUR) provides partial exposure to cybersecurity as well as other technologies such as advanced robotics, the “internet of things,” cloud computing and big data.
Regardless of how you feel about self-driving cars, there’s little stopping companies from developing them, and society is slowly accepting their use. For investors, it’s the next big automotive play.
Evolve Automobile Innovation Index Fund (CARS) invests primarily in equities of companies that are directly or indirectly involved in developing electric drive-trains, autonomous driving or network connected services for automobiles. Some options in this space in the U.S. market include KraneShares Electric Vehicles and Future Mobility ETF (KARS), InnovationShares NextGen Vehicle and Technology ETF (EKAR) and Global X Autonomous & Electric Vehicles ETF (DRIV).
Artificial intelligence (AI)
AI, in which machines do the work of humans, is affecting all businesses, from consumer goods to manufacturing. It not only powers services such as Netflix and Apple Inc.’s Siri, but also helps production lines and call centres run more smoothly.
“AI enhances productivity, and productivity is everything,” says Mr. Solomon. “If your competitors use it and you don’t, you’re out of business. Everyone will have to embrace this in some form or another.”
Several AI ETFs are on the market today, including Horizons Robotics and Automation Index ETF (RBOT), which invests in companies involved in the development of robotics and/or AI. There’s also iShares Robotics and Artificial Intelligence ETF (IRBO) and Global X Robotics & Artificial Intelligence ETF (BOTZ).
The rise in extreme weather – and, in turn, increasing costs to business and society – has led more governments to mandate changes, such as carbon taxes and emission targets, to try to curb climate change.
“The world is becoming aware that this is no longer a luxury where we can move at our own pace,” says Mr. Solomon. “Anything related to the environment would be a secular trend over the foreseeable future. It’s very hard to deny that.”
For investors, that means several potential plays, from clean energy and electric vehicles to water. Invesco Ltd. has three water-themed ETFs, for example: Invesco Water Resources ETF (PHO), focused on water infrastructure; Invesco S&P Global Water ETF (CGW), which tracks the S&P Global Water Index and invests in companies that will benefit from the increased demand for water; and Invesco Global Water ETF (PIO), which tracks the Nasdaq OMX Global Water Index and focuses on global companies that create products for water conservation and purification.
Investors will also find funds that leave out emission-heavy companies and sectors, such as Desjardins RI Global Multifactor – Fossil Fuel Reserves Free ETF (DRFG) or SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX).
“There are so many subthemes in that macro theme,” Mr. Solomon says.
Demographics: Millennials and baby boomers
Millennials may be the most-discussed and analyzed generation in history, but for investors, the spotlight is warranted as this increasingly influential generation continues to drive trends – and consumer spending. It’s why funds such as Global X Millennials Thematic ETF (MILN) were created with a broad range of categories from social media and entertainment to food, clothing, travel and fitness.
Still, Mr. Solomon is skeptical about investing specifically in what millennials want: “They can turn on a dime: Look at the [baby] boomers who were hippies and then became the ‘Me Generation,’” he says.
Instead, he would be more inclined to have exposure to baby boomers in the developed world. “When people get older, there are things you’re undeniably going to need,” he says, such as pharmaceuticals and other forms of health care. He points to funds such as Global X Longevity Thematic ETF (LNGR), which invests in companies in sectors such as health care, pharmaceuticals and senior living facilities.
At Oakville, Ont.-based Bellwether Investment Management Inc., CEO Bob Sewell is focused on dividend-growth ETFs to capitalize on aging boomers.
“It’s a way to generate higher income in the portfolio and have that income growth over time to provide some inflation protection for the client,” says Mr. Sewell.
Some of the ETFs his firm owns or has owned in this area include iShares Core Dividend Growth ETF (DGRO) and BMO Canadian Dividend ETF (ZDV). He also holds Horizons Active Preferred Share ETF (HPR), an actively managed preferred-share ETF that is both tax efficient and has a higher yield.
Although investment themes can play an important part in any portfolio, Mr. Sewell says diversification is still important.
“I don’t think just putting together a half dozen thematic ETFs creates a portfolio,” he says. “It’s about the right portfolio construction to create the right risk profile for the investor.”