Industry Updates

Are thematic ETFs moving beyond retail investors?

Thematic ETFs were once thought to be a fidget spinner-style fad for retail dummies. But times are a changing.

David Tuckwell

Grid of multiple themes

Thematic ETFs have always offered something of a throwback to the good old days.

In the old days, there were no official sectors. That is, there were no giant global index providers – like MSCI, S&P, FTSE – working together to decide what counts as a sector in the economy and which companies belonged to it.

Instead, fund managers sort of got to make it up. If they believed there was demand for energy sector exposure, they would decide which companies were in the energy business and why, and how much of their shares they should buy.

The official sector definitions – codified under “GICS” – came along later and introduced standardisation (and commoditisation) and killed all the fun.

Thematic ETFs bring the fun back

Thematic ETFs allow fund managers essentially to invent their own sectors, as they could in the old days. Thus thematic ETFs that invest in robotics, internet or video games companies can equally be thought of as sector ETFs.

Yet because they do not offer standard sector exposures, thematic ETFs have often struggled to pick up big institutional buyers. And – rightly or wrongly – they’ve earned a reputation as being gimmicky products for retail investors.  

But according to David Mazza, managing director at Direxion, institutional investors are starting to warm up to thematic ETFs.

He said: “If you look at the data and dig into the trading volumes you will certainly see some behaviour that seems retail, such as smaller orders or odd lot orders. But if you then take a step back especially for funds that are north of $100 million dollars [there are trades] that cannot be retail.”

As a way of example, he gives Direxion’s own thematic ETF, the Direxion Work From Home ETF (WFH). When it was launched, there were commentators who said working from home was just a fad. And it was presupposed by some that a work from home ETF – which constitutes something of a change of direction for Direxion, as a leveraged and inverse specialist – would not outlast the coronavirus. However WFH – which has sucked up $140 million in just three months – is being purchased in some instances by institutions too, Mazza said.

However, we may have been here before. Throughout previous iterations of product development, critics have said they were gimmicky and targeting – or exploiting – retail investors naivete. Leveraged and inverse ETFs are one example of this (campaigning against them continues to this day).  Single country ETFs - especially small or frontier economies such as Nigeria or Greece - were also sometimes put in the gimmick bucket in the US.  

However, Mazza adds that scepticism is “always healthy” when it comes to new products - including thematics. And healthy scepticism may in fact help it grow. 

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