You Invested in Me and Said I Was Your Favorite ETF
Gather around, let us tell you about a folklore on thematic ETFs:
Thematic ETFs provide good portfolio diversification, lowers risk, and requires less time and management for the everyday investor.
In 5 years, the industry grew from $5b to over $25b and the number of thematic ETFs grew from less than 10 to over 125. The majority of the growth came from emerging technology trends (e.g. cloud computing, cybersecurity, artificial intelligence, clean energy).
Quick refresher: what is an ETF?
An Exchanged Traded Fund (ETF) is a basket of securities (stocks, bonds, and commodities) that can be bought and sold like a stock. An investment in an ETF will give the investor a diversified portfolio of assets.
ETFs – Like stocks, without the headaches…
A thematic ETF is a special type of ETF that invests in companies that fit within a trend, i.e. those looking to bet on the future of cybersecurity can invest in an ETF that includes a basket of software and hardware security companies. Several advantages of thematic ETFs include:
- Diversification… Thematic ETFs will often invest in over 30 different stocks.
- Lower risk… Allow investors to bet on a sector/trend as a whole, rather than an individual company that carries greater risk (e.g. bankruptcy, fraud, operational issues).
- Less time and maintenance… Researching a trend often requires less time than analyzing individual companies. Thematic ETFs can often be held for a longer period of time without active management.
Over the past couple of months, everyday investors rushed into thematic ETFs to profit on trends that benefited from COVID. After the airline industry crashed, these investors put their money into the U.S Global Jets ETF ($JETS), an ETF holding over 30 different airline companies, to bet on a potential rebound in the industry. Direxion jumped on the work from home opportunity to launch the Direxion Work From Home ETF ($WFH).
Top performing thematic ETFs of 2020:
- 55.42% return: ARK Genomic Revolution ETF ($ARKG)… Invests in companies that enhance the quality of human life using technology, science, and genomics.
- 52.50% return: WisdomTree Cloud Computing Fund ($WCLD)… Invests in cloud software and services.
- 48.37% return: ProShares Long Online/Short Stores ETF ($CLIX)… Invests in e-commerce retailers and shorts (bet against) retailers that sell primarily in physical stores.
- 47.08% return: ARK Next Generation Internet ETF ($ARKW)… Invests in companies that benefit from or enable next generation internet technology (e.g. cloud, e-commerce, big data, artificial intelligence).