Indeed, it might be said that European thematic ETFs are having something of a moment.
In the space of the past few weeks, two separate launches have highlighted the medicinal cannabis space as being an area to watch (the Rize Medical Cannabis and Life Sciences ETF and HANetf’s Medical Cannabis and Wellness ETF) while new funds focusing on cybersecurity and a Royal Mint Physical Gold ETC Securities fund hint at the breadth of possibilities existent under the thematics banner.
Of course, European thematics have been in the news before 2020 rolled around. Providers such as LGIM (the old ETF Securities as was) have been offering funds for some time which leverage advisory firm ROBO Global’s knowledge in the field of robotics and AI focus.
But the new funds already this year, intriguingly, come from new start-up providers. The newest of these kids on the block is Rize ETF which launched one of the cannabis funds in mid-February, alongside the cybersecurity fund.
The other funds come from HANetf, the white-label provider launched three years ago by ETF veterans Hector McNeil and Nik Bienkowski who helped launch the thematics propositions at ETF Securities (which was subsequently bought by LGIM) and also worked at Boost/WisdomTree.
The company has also helped launch the Kuwait-specific KMEFIC Kuwait ETF and three HAN-GINS technology and innovation funds.
McNeil, co-founder and co-CEO, says thematics provide one route for newer providers to enter the market without having to specifically take on the global behemoths of the ETF sector.
“Being value-added to investors is probably the only way that you can take on the supermarket providers who are typically jack-of-all-trades and master-of-none,” he says. “Whether its inventing gold ETFs, issuing Europe’s first three times short and leverage platform, issuing Europe’s first Cannabis ETF and first full-services white-label platform, it’s a mantra we have always pushed.”
In the US, as befits a more mature market, thematics have a longer history and Joy Yang, product specialist at marketBeta, says as the price war at the top end of the market “reaches its end game”, there is room globally for smaller new entrants, alongside incumbents, to enter the area of “niche products.”
“The current proposition for niche thematic products is no different from previous investment products focused on narrow themes such as gold or current broader themes such as ESG,” Yang adds. “But identifying a theme is different from identifying a good long-term investment opportunity. The impact of Moore’s Law means emerging technology innovations have shorter and shorter lifespans.”
The idea that investors need to move faster to catch emerging business trends is picked up on by Bernie Thurston, CEO of data provider Ultumus. Indeed, he says he is “intrigued” by the very term thematics.
“To my mind these are not actually pure thematic structures,” he says. “They are merely reflections of the fact that the conventional sector structures have not really been updated to reflect the modern landscape of robotics, AI, healthcare, medical marijuana.”
These are just modern sectors he goes on to say. “Why should they be separated from any conventional cyclical investing? We actually just need to design sectors that correctly reflect the industry of Tesla, rather than manufacturers of tyres and rubber.”
McNeil suggests it is the structure of regulation around fund management that gives a thematic approach some appeal to investors. In the UK and Europe, the rules around MIFID II and RDR means financial advisers have shifted from managing money to managing managers. The cost implications and the focusing on managing portfolios means the “main focus has been on core portfolios made up off of building block ETFs.”
“What thematics do is allow the story of theme to be passed onto the end client by the manager and show over and above the low-cost core portfolio the financial adviser is also adding value by offering a differentiated theme,” he says. “This shows their clients they are not just a me-too adviser. Our job as the issuer is to provide the content to back up the adviser’s advice.”
In fact, the content of any given thematic ETF can sometimes be an issue. McNeil points out that he has seen what he calls “placeholder” funds, particularly with such emerging areas as blockchain.
“This was best seen with blockchain where several ETFs came to market and were chock full of stocks like Amex, Goldman Sachs etc,” he points out. “This was due to not enough specific stocks being available. The basket of stocks needs to have stocks in it where they will grow if the theme/sector grows as expected.”
It will not just be the smaller players who will be monitoring performance with the thematic sector. There are suggestions that the smaller new entrants might have room to innovate in thematics for now but that the larger providers will also be eyeing up events.
“I do not think a successful thematic firm will waste their time trying to compete with the iShares and Vanguards of this world,” Peter Sleep, senior investment manager at 7IM, says. “It is more likely that once they build up a profitable business they will seek a lucrative exit for the founders as we have seen at Source and ETF Securities.”
Thurston agrees, noting for instance that soon after HANetf launched its Kuwait fund, Invesco followed up with its own version, the Invesco MSCI Kuwait UCITS ETF.
“The big providers are monitoring these thematics for break-out performance,” he notes. “This has been going on since the ROBO created the first breakout thematic ETF: iShares then launched the iShares Robotics and Artificial, which despite having a differing structure and focus, obviously went after the same interested investors at a lower fee.
“The big players are enabling the smaller providers to undertake the research and development and any successful products will then be replicated.”
Sleep is not convinced by thematics – suggesting he “fails to see their social utility” – but he also believes that while they are innovative and provide “the best way for new payers to enter the market”, they are not the main event. “These products will always be a side show to the core ETF business,” he concludes.
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