Citi: Concentrated thematic ETF ownership can impact liquidity

ETFs collectively own over 20% of some small cap companies as a result of rising demand for thematic strategies

Tom Eckett

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A number of small cap stocks owned by thematic ETFs are at risk of greater liquidity and performance impact, according to research conducted by Citi.

The research note, entitled Thematic Comes of Age, predicted the rise of thematic ETFs would continue on from the surge in flows last year.

According to data from Morningstar, thematic ETFs in Europe saw a record €9.5bn inflows as investors piled into the latest megatrends on offer.

However, the rising demand has led to increasing ETF ownership concentration particularly in small and micro caps which is leading to the potential for liquidity risks if the flows reverse.

One of these stocks is Compugen. Some 24.4% of the company is owned by ETFs including the $766m Invesco NASDAQ Biotech UCITS ETF (SBIO).


This also became a major issue in some stocks in the two BlackRock clean energy ETFs which saw $7.5bn inflows in 2020.

The huge inflows caused concentration risks leading to S&P Dow Jones Indices to propose changes to the index last month in a move to reduce constituent concentration, ease liquidity limitations and improve index replication.

As Scott Chronert, managing director at Citi, and co-author of the report, said: “A variety of niche small/micro-cap names show concentrated thematic ETF ownership, suggesting liquidity impacts are more likely.”

This issue was also raised by Jordan Sriharan, head of MPS and passive at Canaccord Genuity Wealth Management (CGWM), during ETF Stream’srecent webinar on ESG ETFs, who highlighted underlying asset liquidity as a key metric to take into account when selecting thematic ESG ETFs.

“Our focus is on more targeted thematic ideas in ESG such as battery technology so understanding the underlying operation effects is even more important,” he added.

A damning assessment of thematic ETF

Overall, Chronert predicted there will be increasing demand for a broader range of thematic ETFs in 2021 as part of the shift in post-coronavirus pandemic positioning.

As the report highlighted, not all thematic ETFs offer exposure to the tech sector and momentum and growth factors.

“Value-orientated themes could be attractive in a post-pandemic/recovery trade,” the report continued. “There are thematic products that can benefit from early cycle conditions, meaning there are various potential levers to thematic ETF growth and product innovation.

“Infrastructure, natural resources, water, EV/mobility and agriculture actually show value tilts based on equal-weighted average fund returns.”

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