The world is changing faster than ever before, and so too are global markets – which presents both challenges and opportunities for investors.
In this climate, the rise of thematic investing makes sense. By exploring the market through a lens of broad macroeconomic themes and megatrends, investors can identify and tap into the latest societal and economic shifts by gaining exposure to the asset classes and companies which are set to benefit.
Given the breadth and depth of emerging global thematics, it can be difficult to pinpoint and select the exact companies which will benefit the most. This is where exchange traded funds (ETFs) can assist, providing broader exposure to a country or sector, and be a valuable supplementary investment to support individual stock picking.
With more and more targeted and innovative ETFs emerging in the last few years, there’s no surprise ETFs are becoming a fast favourite in investors’ portfolios.
Here we discuss a few attractive investment themes in the market currently, and how investors can easily gain exposure.
The catalysts triggered from the COVID-19 pandemic will continue to play out for many years to come and unsurprisingly, there has been a huge reliance on the health sector. As the vaccine is rolled out across the globe throughout 2021, and many countries continue to battle serious outbreaks, the focus on health will remain prominent for the foreseeable future.
Beyond COVID-19, the sector will also be driven forward by government spending and private health insurers, along with ageing populations and the need for continued innovation.
While there are a few top performing Australian healthcare companies, such as CSL (ASX:CSL), Ansell (ASX:ANN) and Sonic Healthcare (ASX:SHL), some companies are arguably traded at inflated valuations because of their scarcity in the market. The sector is also flooded with biotech companies that could be considered too small and speculative for many investor portfolios.
Investors can achieve better diversification by looking to global healthcare funds, which offer exposure to global giants. ETFs worth considering in this sector include the BetaShares Global Healthcare ETF (ASX:DRUG) and Blackrock’s iShares Global Healthcare ETF (ASX:IXJ).
These ETFs offer diversified exposure to companies producing vaccines, such as Pfizer and Johnson & Johnson, as well as other leading health giants like Merck, United Health, and Roche.
As an investor, you would have no doubt noticed the heightened expectations for companies to improve their environmental, social, and governance (ESG) standards, and report against it.
Historical data and research from ACSI show those companies which incorporate ESG factors into their business decisions perform significantly better overtime than those who don’t. A big part of the ESG conversation currently is around how investments are impacting climate change, given this will be a prominent societal issue for years to come.
One approach for looking at climate friendly investments is to consider ETFs that include companies focused on becoming carbon neutral – a topic which has been thrust into the limelight as of late. Contributing to this conversation was Prime Minister Scott Morrison announcing his net-zero carbon emissions target by 2050 on the government’s to-do list in early February.
For example, the BetaShares Climate Change Innovation ETF (ASX:ERTH) tracks the performance of an index comprising of up to 100 leading global companies that derive at least 50% of their revenues from products and services that help to address climate change and other environmental problems through the reduction or avoidance of CO2 emissions.
Also consider the VanEck Vectors Global Clean Energy ETF (ASX:CLNE) which tracks the S&P Global Clean Energy Index, which encompasses 30 of the largest and most liquid companies with businesses related to global clean energy production, technology and equipment, from both developed and emerging markets.
These two examples are focused on the environmental aspect of ESG. However, watch this space in the coming years, as social and governance factors will become more pronounced. Companies who are leading the pack from an environmental standpoint now will be more likely to be among the first movers from a social and governance perspective too.
Technology: in or out of fashion?
It would be amiss to not reference the technology thematic, given how well the sector has performed in recent times. Tech stocks truly shone while everyone was locked indoors, but now their time in the limelight may now be drawing to a close.
However, many of the tech sub-sectors, such as cybersecurity, artificial intelligence, e-sports and software development, are worth looking into. And, given the broader shifts in the market, there are plenty of opportunities to explore entering tech at a discounted price point.
In the last year, Australian tech stocks, including Afterpay (ASX:APT) and Zip (ASX:ZIP), have shot the lights out. The BetaShares ATEC ETF (ASX:ATEC) which tracks the S&P/ASX All Technology Index reiterates this, delivering an 83.08% return in the 12 months to 31 March.
A significant portion of the world’s largest technology firms are based in the US, so investors who are seeking broad exposure to the sector usually gravitate to the tech-heavy NASDAQ 100, which includes names such as Microsoft, Facebook and Twitter.
ETF options in this space include the BetaShares NASDAQ 100 ETF (ASX:NDQ) which replicates the Nasdaq index, and the Morningstar Global Technology ETF (ASX:TECH), which includes stocks that Morningstar believe have a competitive advantage and attractive prices.
Outside the US, the Asian technology market is also expected to outperform, driven by the younger, tech-savvy population and high levels of online activity in the region. BetaShares Asia Technology Tigers ETF (ASX:ASIA) was launched in 2018 to provide access to this growth market.
Lastly, robotic and cybersecurity are two sub-sectors that are showing no signs of slowing. In recent years there have also been a number of technology funds launched in Australia including the BetaShares Global Cybersecurity ETF (ASX:HACK) and the ROBO Global Robotics ETF (ASX:ROBO).
Looking for more ideas?
As with any ETF, investors thinking about a sectoral or thematic investment should consider the underlying index the ETF is tracking and whether the ETF suits their risk profile. While a particular theme could be the new hot trend today, it can always fall out of favour further down the track.
It’s worth nothing that sometimes these more specialist ETFs have higher fees, particularly if they have an active management element, so reviewing the Product Disclosure Statement is critical.
Pay close attention to the fees, composition, and exposure the product provides to ensure alignment with your personal wealth goals.
Want an easy way to compare
With over 265 ETFs available through the Australian share market, this is an unrealistic number to easily compare and can often be a pain point for investors.
As a Bell Direct client, you can access the Bell Direct ETF Filter which enables investors to simply compare ETFs by performance, fees, asset class, sector, issuer and ICR, and choose the right one for your portfolio.
You can trade ETFs for free when you join Bell Direct before July 31st. Check out the offer here and take advantage while you still can.