ETF Focus: ETFs with themes: popular, but a small share of the market

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From Jesus WWJD, +0.26%  to pot MJ, -2.93%, from the Cloud CLOU, -0.13%  to outer space UFO, +0.40%   whatever your investment thesis, there’s likely a thematic ETF for that.

Or is there?

Innovative exchange-traded funds with clever marketing and cute tickers grab lots of media attention, but command a relatively small share of the number of funds and total assets invested, according to a new analysis. Even so, the development of a system to classify such funds in order to analyze them speaks to their growing appeal.

The report comes from Global X, a thematic ETF provider – MarketWatch profiled its “Conscious Capitalism” fund KRMA, -0.55%   in August – in order to classify the “disruptive themes and the thematic ETFs that track them,” and follow industry trends in this area.

Related: Do well by doing good with this fund that supports freedom and human rights

One of the most useful sections of the Global X report might be its attempt to define “thematic investing,” before even quantifying it. The company defines thematic investing as a “long term, growth-oriented strategy, that is typically unconstrained geographically or by traditional sector/industry classifications, has low correlation to other growth strategies, and invests in relatable concepts.”

What does that mean?

“There must be high conviction that the theme will materialize and have a meaningful impact on segments of the economy or markets,” Global X explains.

In addition, there must be a way for investors to access that theme, which means there have to be publicly-traded companies with that theme whose stock can be bundled into a fund. Ideally, that’s a broad group of companies, all of which have high liquidity and attribute a substantial portion of their business operations, including revenues, assets, research and development to the theme.

That may sound obvious, but some themes may struggle to find a broad enough basket of securities that meet its criteria. In the case of Nuveen’s ESG High Yield Corporate Bond ETF NUHY, -0.24%   that constraint makes the fund a riskier bet because it’s less diversified. And for the Procure Space ETF UFO, +0.40%  , a “space economy” fund, it simply means the fund has a lot of generalist stocks that help support outer space exploration from a very terrestrial perspective: ground equipment manufacturing, satellite-based telecommunications, and so on.

Finally, “a theme must be expected to express itself over a medium to long-term time horizon,” Global X says, meaning five years or more. That allows enough time for the theme, not lucky market timing, to be proven out.

Read: Want to profit from the housing shortage? There’s a new ETF for that.

Global X points out that thematic ETFs hold only $25.1 billion, out of $4 trillion in the overall ETF space. And they represent only 119 funds out of about 2,300.

The company’s classification system includes three categories: Disruptive Technology, People & Demographics, and Physical Environment, which contain 10 “mega-themes” including Big Data, Digital Content, FinTech, Connectivity, Robotics, New Consumer, Health, Climate Change, Infrastructure Development, and Mobility. Within the mega-themes sit about three dozen smaller themes ranging from Millennials to Blockchain to 3D Printing.

In the third quarter of 2019, five thematic ETFs launched, Global X noted. Four of them invest in cannabis, and one is focused on cloud computing. Meanwhile, funds in Global X’s Climate Change category had the biggest growth in assets during the quarter.

See: Here’s the right way to trade ETFs

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