The first Exchange Traded Fund (ETF) was listed on the Toronto Stock Exchange in 1990—the TIPS (Toronto 35 Index Participation Fund) tracked the TSX 35 index. It traded for roughly three years before the first ETF was listed in the U.S. Since 1990, the number of ETFs worldwide has grown to more than 8,500 with more than $10 trillion of assets under management (AUM).
ETFs are pooled investment vehicles that are a flexible and convenient way to access a diversified portfolio of stocks or bonds in a single position. Where investors were once limited to individual stocks and bonds, today ETFs make it easier to diversify in a particular asset class, region, and risk level. Best of all, they can be traded similar to a stock.
ETFs have completely changed the investing landscape. They’re so popular that they’ve become the fastest growing investment product in terms of both assets and product range.
Over the years, ETFs have evolved from mainly tracking an index like the TSX60, S&P 500, and Nasdaq100, to conquering all asset classes, themes, and strategies. In fact, if you’re interested in a particular industry, sector, asset class, or region, there’s probably an ETF for that—from Bond ETFs, Real Estate ETFs, socially responsible ETFs, commodity ETFs, sector ETFs, country-specific ETFs, and thematic ETFs.
What Are Thematic ETFs?
Within the ETF universe, thematic ETFs have been one of the most popular segments. Here in Canada, thematic ETFs account for approximately two percent of the $321 billion in AUM in Canadian listed ETFs.
What’s the appeal of thematic ETFs? It’s all about capitalizing on the wave of change that is transforming technology, society, economics, the environment, and demographics.
Thematic ETFs invest in disruptive megatrends (like the Internet in the early 90s) that transform the way we live and work.
Where some ETFs rely on past performance to predict future gains, thematic ETFs take a predictive approach to future growth. And because they analyze innovative, emerging trends, thematic ETFs are ideal for investors with a long-term investing horizon.
On top of that, since thematic ETFs invest in multi-year, multi-decade trends, near-term volatility in the market shouldn’t derail their long-term potential. Interest rates are going up and inflation is surging, but the infrastructure needed for smart cities and development of electric vehicles is still moving forward.
What Are Some Megatrends Shaping Our Future?
Thematic ETFs allow investors to zero-in on transformative trends that are expected to grow significantly over the next 5, 10, or 20+ years, rather than just specific sectors or geographies.
Six megatrends that are attracting attention include:
- Technological breakthroughs
- Demographics and social change
- Rapid urbanization of so-called Smart Cities
- Environmental changes
- Next generation economies and emerging global wealth
- Shift in demographics, aging population, and meeting needs of targeted consumers
What Are Some Examples of Innovative Thematic ETFs?
Thematic ETFs provide investors with the kind of diversification they can’t get with one stock. If they like Tesla because of the rapid growth in electric vehicles, they’ll look at ETFs that target the automotive and electric vehicle industry. If they like Nintendo because of the surge in popularity of gaming, they’ll look at an e-gaming index ETF.
Below are some examples of thematic ETFs and why they are attracting a lot of attention.
Automobile innovation is expected to be one of the biggest disruptive technologies over the next 10 years. Autonomous cars will improve road safety, while electric vehicles and charging stations will lead to a cleaner environment.
According to a recent report from analysts at Bloomberg New Energy Finance, sales of non-plug-in internal combustion (IC) vehicles peaked in 2017 and are in permanent decline. By 2040, 90% of global vehicle sales are expected to be electric vehicles (EVs).
Electric batteries make up one third of the cost of an EV, as battery costs continue to go down, demand for EVs will rise. By 2030, battery production costs are forecast to decline by 73%.
The industry needs to build the infrastructure to make that a reality. In 2018, the EV charging market was worth $4 billion, by 2025 it is expected to top more than $46 billion, expanding at a compound annual growth rate (CAGR) of 41.75%.
Cyberattacks are on the rise. They are more sophisticated, victimizing more sensitive targets, and causing more severe retribution. Globally, 30,000 websites are hacked every day, and 64% of companies have been the victim of at least one form of cyberattack.
Protecting individuals and businesses from cyberattacks is a lucrative business. From 2021 to 2025, the global spend on cybersecurity is estimated to climb from $133.8 billion to $213.7 billion. Over the same timeframe, the economic impact of cybercrime is forecast to expand 75% from $6.0 trillion to $10.5 trillion.
As the number one risk facing enterprises today, cybersecurity will continue to be one of the fastest growing industries needed to support all new technologies.
The metaverse is poised to be the next generation of the internet. It’s still in its infancy, but it is expected to impact all corners of society, from business, healthcare, education, gaming, entertainment, travel, social interactions, and more.
In 2021 the metaverse was valued at $39.25 billion, by 2030 the metaverse is predicted to close in on $1 trillion, growing at a CAGR of 43.25%. That huge increase in value will be fueled by a growing number of people spending time in the metaverse.
By 2026, it’s estimated that one quarter of the global population will spend at least one hour per day in the metaverse and 30% of global organizations will have products and services available in the metaverse.
Regardless of your investing interests, there’s bound to be an ETF for you. Thematic ETFs are an excellent way for buy-and-hold investors to take advantage of growth-oriented megatrends. They are also a great way to buy a basket of innovative companies, which takes the pressure off individual stock selection. The biggest decision for most investors is knowing which disruptive trend to consider.
Give Your Portfolio an EDGE
The Evolve Innovation Index Fund (EDGE ETF) provides access to global companies involved in disruptive innovation across a broad range of industries, including cybersecurity, cloud computing, eGaming and eSports, automobile innovation, 5G, genomics, and robotics and automation. EDGE ETF helps take the guesswork out of investing in the future. To learn more about this fund, visit https://evolveetfs.com/edge/.
Stay updated with latest information on investing in innovation and industry updates on related investment products, sign up for our weekly newsletter.