• Global X forecasts the next five years will be characterised by continuing rise of thematic ETFs
  • Thematic ETFs popular among millennials and younger investors leveraging long term trends
  • Global X reckons investors are looking for selective growth and defensive at the same time

An exchange traded fund (ETF) is a basket of shares which can be bought or flogged through a broker on a stock exchange.

Today, they exist across every conceivable asset class through themes (like New Metals, Chinese Tech or perhaps Smoking and Gambling with AdvisorShares Vice ETF (VICE)). They encapsulate traditional investments, alternative assets, commodities or currencies old and new.

When it comes to ETFs, IDFK just won’t cut it for Stockhead’s intrepid and indefatigable Nadine McGrath. Each week she’ll be sharing the highs and lows on her long and lonely quest… to become One with the ETF.

Global X ETFs Australia says thematic investing is here to stay after compiling the major investable trends that it reckons are shaping the development of Australia’s growing exchange traded fund (ETF) sector.

In a conversation with Global X Head of Investment Strategy Blair Hannon he said thematic investing had a step change during Covid-19 when investors were spending more time on their portfolios.

He said following the World Health Organisation declaring an end to Covid-19 as a global health emergency that a new normal for thematic investing is on the horizon for the local ETF market.

While Australia’s $142 billion ETF industry has been dominated historically by funds flowing to vanilla broad ETFs, Hannon forecasts the next five years will be characterised by the continuing rise of thematic ETFs and product innovation.

Hannon said thematic ETFs enable investors to respond to market moves at a local and global scale.

Global X’s top strategist said this was particularly evident during the pandemic when Morningstar Direct research showed a peak of more than US$20 billion inflows into thematic funds.

He said although flows have tapered off, levels are still sitting higher than before the coronavirus market crash in March 2020, indicating an appetite from investors to capture thematic opportunities.

“While thematics have been around a long time they really did take off during covid but now there’s this mentality investors are going back to core allocations.”

However until now core allocations tended to be geographic like the ASX 200, S&P 500, Europe, China.

“Generally, core beta allocations gravitate to being low-cost geographic-focused ETFs but thematics are different because you’re not just taking a broad-based country focus but a longer term idea,” he said.

“The idea might be you fundamentally believe in is that decarbonisation is happening and how do I want to invest in line with that, which you can’t do with a broad-based ETF like the ASX 200.”

Hannon believes the reason thematic ETFs are here to stay and likely to get stronger is they enable investors to identify and leverage long-term structural trends to build wealth over time.

Thematic ETFs in hius view, are about identifying powerful macro-level trends and the companies that stand to benefit from those trends over the years to come.

“Millennial and younger investors particularly love that they can invest in specific sectors according to their special interests and personal values… It gives investors the opportunity to be targeted and specific about what they believe in and allocate funds to that,” he said.

READ: How Megatrends become Thematics ETFs – there’s much more to it than you may think

Hannon said thematic ETFs tend to be satellite investment and therefore represent around 3-5% per allocation in a portfolio.

“The ever-expanding selection of thematic ETFs alongside core ETFs that track benchmark share and bond market indexes as well as important commodities such as gold is allowing investors to build entire portfolios using ETFs,” he said.

“This is happening as the active funds management industry comes under greater pressure.”

“As providers, we need to be at the forefront of megatrends which will offer value to investors,” he said.

READ: Aussie ETF sector outplayed private managed funds last year by $40 Billion


Rise of lithium and copper ETFs

While Global X is a relatively new name to Aussie investors (having taken over ETF Securities in June 2022), their US counterparts have been operating since 2008, with a key focus on thematic investing.

Global X offers 32 ETFs in the Aussie market with 11 in the thematic space, providing the opportunity to invest in disruptive technology, decarbonisation commodities, including hydrogen, copper, and lithium.

Hannon said the Global X Copper Miners ETF (ASX:WIRE) and Global X Battery Tech and Lithium ETF (ASX:ACDC) were proving particularly popular with investors.

WIRE has seen inflows of $64m so far in 2023, while ACDC has seen outflows of $19 million, the first time since listing in 2018, as profit taking has occurred in the face of strong growth.

It’s important investors understand what is under the hood of thematic ETFs to know what they are purchasing, Hannon warned.

“Investors could look at say ACDC and think I should be down 30 to 40% because of the exposure to lithium miners which have seen a sell off in recent times.

“However, as you are playing the whole supply chain of electric vehicles, you’re not just exposed to lower lithium prices. Incidentally, lower lithium prices actually help battery and car manufacturers which you have exposure to through a broad product like ACDC.

“It’s important to note that lithium is a part of a bigger theme towards electrification and ACDC is playing really the whole EV supply chain.”

The Global X Morningstar Global Tech ETF (ASX:TECH) is also proving popular with investors wanting exposure to tech but not wanting to pay the higher P/Es for the big players like Apple.

“It focuses on small and mid-cap tech, so they are not overpaying for big tech,” he said.

“Investors are saying they don’t necessarily want to pay up for Apple and Microsoft after the big runs, so they potentially look at the smaller end. The problem is they may not know those smaller companies in detail so put more trust in a Morningstar index via a Global X ETF.”


Learnings from volatile 2022

There’s no doubt 2022 was a tough year for global markets as central banks hiked rates to contain rising inflation, while the fallout of the pandemic continued and the war in Ukraine added further pressure to struggling supply chains.

But Hannon reckons investors also learned a lesson or two about handling market risk and higher interest rates.

“People look at 2022 and think 2023 is likely to be something of a similar nature so utilise what they’ve learned to build out a portfolio,” he said.

“We consistently hear from strategists that we are unlikely to see a huge growth year in equities in 2023, consequently investors are now actually getting paid to be allocated to fixed income (via the yield) that hasn’t been there for a long time with the now higher interest rates.

Hannon said there is this juxtaposition between growth and defence allocations among investors.

“The FAAMG stocks are outperforming the broader NASDAQ and Apple is now bigger than the whole Russell 2000.”

He said investors are looking for selective growth and defensiveness at the same time.

“Usually, it’s predominantly growth or a shift to defensive but investors are getting specific around their allocations,” he said.

Hannon said the Global X US Treasury Bond ETF Currency Hedged (ASX:USTB) and Global X Physical Gold (ASX:GOLD)  are also proving popular.

“Even in the face of the US debt ceiling and potential US default we are still seeing flows into the US treasury bond ETF,” he said.

This is both on the primary, where the US treasury is seeing strong demand for its issues, and the secondary market as we see US treasury as a safe haven income source.

He said gold has always been popular in times of inflation and market volatility.

“You can’t buy gold when the crisis hits and have to buy it before to get the benefit which is why we always talk about gold being the insurance policy of the portfolio and a good diversifier.”


Disclosure: The journalist held shares in ACDC at the time of writing this article.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article