While exchange-traded funds are widely used to track broad indexes and diversify portfolios, more investors are narrowing in on niche segments expected to see the greatest growth over the long-term. Thematic ETFs in the United States accounted for 1.06 per cent of 2019 net flows, according to FactSet Research Systems Inc., up from 0.85 per cent at the end of 2018.
With an array of thematic ETFs cropping up across the market, The Globe and Mail asked three experts to give their top picks for non-Canadian, trend-based funds with the potential to outperform the market over time:
David Kletz, vice-president and portfolio manager with Forstrong Global Asset Management Inc. in Toronto
The pick: iShares Exponential Technologies ETF (XT)
Management-expense ratio (MER): 0.47 per cent
This fund, which invests in companies involved in innovative technologies that could potentially disrupt traditional businesses, allows investors to take “a broad approach to the various high-growth tech sectors” instead of trying to understand niche, individual markets, Mr. Kletz says. The ETF focuses on nine global technology themes such as robotics, big data and 3-D printing, with top holdings in Tesla Inc. and Samsung Electronics Co. Ltd. “You get a more robust exposure to these niche technology markets,” Mr. Kletz says. “As a buy-and-hold strategy, aligning yourself with some of these high-growth areas is an interesting strategy.”
The pick: Lithium & Battery Tech ETF (LIT)
MER: 0.75 per cent
This ETF invests in lithium miners, refiners and battery producers. While lithium could be displaced as a global battery technology, its lightweight and high-energy density makes it a front-runner as demand increases for efficient batteries, Mr. Kletz says. Amid the growing need for electric cars, smartphones and renewable-energy storage, the fund is an attractive long-term investment that “plays off a pivot away from carbon and fossil fuels,” he says. With Tesla as its third-largest holding, Mr. Kletz notes the fund includes companies that use lithium batteries rather than being involved in the production, which could be a “surprise to some investors looking for a tighter correlation to the underlying lithium price.” Lithium prices fell sharply, and shares in major lithium producers dropped over the past year as producers generated more of the metal than automakers needed. Mr. Kletz says volatility in the sector is to be expected, given the fluctuating demand, but expects it to perform well over the long-term.
Jeff Leung, vice-president and senior investment adviser with Wellington-Altus Private Wealth Inc., Toronto
The pick: Ark Innovation ETF (ARKK)
MER: 0.75 per cent
This ETF, which aims to invest in companies that rely on or benefit from the development of new products or services, technological improvements and advancements in scientific research, should continue to perform well as companies across sectors adopt new technologies such as genomics, autonomous cars and fintech, Mr. Leung says. With US$2.03-billion in assets under management, ARKK has climbed 37.4 per cent over the past three years as of Jan. 17, according to Bloomberg data, outperforming the S&P 500’s 13.6-per-cent rise over the same period. This actively managed fund, which is overweight in health care at 37 per cent, has a Canadian-dollar counterpart called the Emerge ARK Global Disruptive Innovation ETF (EARK), which launched in July, 2019, making it a convenient choice for Canadian investors, he says.
The pick: KraneShares CSI China Internet ETF (KWEB)
MER: 0.75 per cent
The fund tracks the CSI Overseas China Internet Index, which measures the performance of publicly traded China-based companies focused on the Iinternet and internet-related sectors that are benefiting from increased spending of China’s growing middle class. Mr. Leung points to Alibaba Group Holding Ltd., the largest holding in the fund, which attracted US$38.4-billion in revenue from its annual sales event known as Singles Day, surpassing Amazon.com Inc.’s Prime Day, which generated an estimated US$6-billion. Mr. Leung added that the average investor may not want to take such a concentrated stake in China and would prefer a broader fund such as ARKK.
Rob Jackson, head of ETF strategy with Adaptive ETF in Toronto
The pick: iShares Nasdaq Biotechnology ETF (IBB)
MER: 0.47 per cent
This ETF, which holds shares in biotech and pharmaceutical companies, is a solid long-term play under the thesis that health care and medical advances will continue to be among the stronger sectors, Mr. Jackson says. “The caveat here is that the ETF is a higher-beta product,” he says, referring to funds that tend to have greater volatility than the market. While biotech could outperform the market over the long-term, there will be short-term periods of underperformance, Mr. Jackson adds.
The pick: Technology Select Sector SPDR Fund (XLK)
MER: 0.13 per cent
Ultimately, Mr. Jackson cautions against “overly-thematic” funds that could follow “here today, gone tomorrow fads” with high fees. He says investors starting to look at thematic funds should become acquainted with broader ETFs that provide a window into new technology before trying to make a call on which industries have staying power. XLK, which tracks the technology and telecom sector of the S&P 500 Index, provides exposure to the strongly performing U.S. tech sector, including Apple Inc. and Microsoft Corp.