This year has been defined by tightening monetary conditions. With inflation starting to be seen as more persistent than previously believed towards the end of 2021, the Federal Reserve has started raising rates in an attempt to get a handle on price rises. This was only exacerbated by the invasion of Ukraine, which saw prices in commodity markets spike, adding to inflationary pressure.
All of this has seen a steep sell-off in equity markets. However, in a rising rate environment, growth and technology stocks are particularly affected. That has taken a toll on thematic ETFs, owing to the growth and technology tilt of many such funds. Indeed, thematic ETFs lost 6.9% of assets under management during the first three months of 2022, according to data from Qontigo. That marks a reversal following several years of strong growth. In 2019, European-listed thematic ETFs had less than $10bn AUM – by the start of 2022 that sat at around $41bn.
So, does the latest monetary backdrop and outflows mark an end of the thematic ETF boom? Not according to a survey of financial professionals across Europe, recently commissioned by HANetf. The survey was completed by wealth managers and financial advisers in the UK, Germany and Italy, with a collective AUM of over €136bn. The survey is part of the recently published HANetf Thematic Review, which will be released three times a year.
The survey found that professional money managers already have notable thematic exposure. Of those surveyed, 73.3% said they already have over 15% exposure to thematic funds in the portfolios they manage. On top of this, 98.3% have at least 5% exposure to thematic funds. The most popular allocation was somewhere between 15% and 30% – the answer given by 53% of respondents.
When it came to future exposure, a total of 90% of respondents said they expected to increase their thematic exposure over the next 12 months. Meanwhile, 5% said they were unsure and 5% said they did not expect to increase their thematic exposure.
The clients of those surveyed have also become increasingly interested in thematic investing. In response to the question, "have you noticed an increased interest in thematic investing from clients over the past 12 months?”, some 95% responded in the affirmative.
As a result, the bulk of wealth managers surveyed expected European-listed thematic ETF AUM to grow by the end of the year. Using the $41bn AUM as a benchmark, those surveyed were asked where they thought European thematic ETF AUM would be at the end of 2022. The most popular answer (43%) was somewhere between $50bn and $75bn. The second most popular (35%) was between $41bn and $50bn. A combined 10% expected AUM to sit below $41bn by the end of the year.
Financial professionals are split on which themes they are most bullish about. However, among the most popular were blockchain, decentralised finance and the crypto economy, renewable and clean energy and the metaverse.
The largest number of respondents (26.7%) identified “blockchain, decentralised finance, and the crypto economy” as the theme they feel most positive about. Clean and renewable energy was also popular, with 25% of respondents identifying it as the theme they are most bullish about.
When specifically asked about the metaverse as a theme, 93.3% of respondents said they were either very or somewhat bullish. Less than 4% said they were not bullish on theme.
So, while thematic ETFs are currently suffering both declining share prices and outflows, the popularity of the thematic approach to investing should not necessarily be called into question. Ever since the early days of financial markets, investors have attempted to identify the long-term secular trends that are shaping the world and tried to select the relevant securities with the potential to benefit from said trend. That several popular themes are suffering the rerating of prices in the face of tightening US monetary policy does not alter this.
What is newer, however, is investors being able to implement their directional thematic views with increasing ease. The rise of thematic ETFs should simply be seen as an opportunity for investors to invest in themes that reflect their views and values. Investing has two core components: formulating a view and implementing it into a trade. The rise of thematic ETFs, therefore, is about allowing investors to convert their directional thematic views into specific trades through low-cost, transparent, easy-to-access vehicles. If investors are to continue to take a thematic approach to investing, we should expect them to also continue to opt for ETFs as the optimal way to achieve this.
Tom Bailey is head of content at HANetf