Article

The themes driving the world of tomorrow

Lynn Hutchinson, Charles Stanley’s exchange-traded fund (ETF) specialist looks at today’s most-important investment themes.

| 4 min read

In 2020, investors added approximately $100bn of new money into thematic ETFs. Over the past 15 months, the assets in this range of products grew by approximately 280%, with investment directed into mostly high-growth industries such as clean energy and technology.

Thematic ETFs still only represent a fraction of overall index-tracking products, with their assets under management making up just 3% of European and US domiciled ETF assets. There are around 200 such thematic products available to global investors and not all will survive the test of time. Realistically, some of these trends are going to work out very well, and some of them may not. In any case, they are designed to be long-term investments and come with the associated volatility.

Thematic investing follows certain social, economic, corporate, demographic or other themes that seem to be popular in society. Opportunities arise in these areas when more investors believe in the same themes. While some investors may see these types of strategies as chasing the latest trend, they can offer the potential for some very good returns. They are often involved in the technology growth story, but companies in these themes often suffer lower returns in a bear market and higher returns than average in a bull market.

Themes from Covid-19

A number of themes have grabbed the interest of investors because of the Covid-19 pandemic. Clean energy is one such area and the ETFs tracking this theme have been extremely popular over the past 18 months. The underlying companies in these products gathered even more interest towards the end of 2020, as governments all over the world set policies in place to try to combat climate emissions.

The flows into clean energy products have been so great that some of the indices being tracked by these ETFs are changing. iShares has both a European and US domiciled ETF tracking the global clean energy theme. Between them, they currently have more than $10bn of assets, $8bn of which was added in the last quarter of 2020. The ETFs currently track just 30 companies.

The new money flows have been so great that changes are now being made in the S&P Clean Energy index, which these two ETFs track. It will transform from an index tracking approximately 30 companies – to anywhere between 70 and 100 shares.

The change will reduce the overall concentration from largely mid- and small-market-capitalisation companies to include a higher weighting allocated to large-cap equities. This may mean the theme is diluted but much more diversified and likely to reduce the overall volatility of the ETF. The index is also likely to expand to include five new sectors including marine energy, alternative fuels, energy storage, energy efficiency and smart grids. The expansion of the index could hurt long-held small caps that may see their position in the index reduced, but benefit “transition” companies eligible for inclusion such as utility companies.

The “new” theme for 2021?

The next generation of wireless technology – 5G – represents a massive leap forward for wireless mobile communications. It is the missing link that will bring the “Internet of Things” to life.

The speed of 5G is close to 10 times faster than previous technology. It will enable autonomous vehicles to move through smart cities and all manner of devices to be connected to the internet and each other.

This new wave of wireless communication has been under development for the last decade – which was largely put on hold in 2020 due to the Covid-19 pandemic. But with infrastructure investing now central to any economic recovery, the rollout of 5G looks positioned to be one of the major themes of the year.


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The themes driving the world of tomorrow

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