Extending your (investment time) horizons with thematic ETFs

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Extending your (investment time) horizons with thematic ETFs

Authored by Global X ETFs

Thematics come in a large range of shapes and sizes in the investment world. ETFs can offer a simple and cost-effective tool by which SMSFs can access these themes. But how do you tell the structurally backed trends from the flimsy fads? Distilling down the basics of thematic investing will allow you to generate potential income and growth opportunities.

What are thematic ETFs?

Thematic investing is a waiting game. It involves identifying an idea or trend which has predictable growth potential over the longer-term. These ideas and trends are generally sector and geographically agnostic, change the status quo and are broadly adopted once they come to fruition. Think of things like the internet and personal electronic devices.

Looking ahead, there are a multitude of megatrends you can leverage in your portfolio through thematic investing. For instance, the clean energy transition, net-zero carbon emission targets, adoption of electric vehicles (EVs), semiconductors and technological advancements.

How to use thematic ETFs in your SMSF?

When using thematics in a portfolio, it is best to remember the ‘core’ and ’satellite’ model in which ‘satellites’ function as a smaller, targeted allocation to a specific area of interest. Thematic ETFs can add an element of growth to this portion of your portfolio.

However, not all thematic ETFs are made equal. So, it is important to ask a few key questions before choosing which product is right for your SMSF goals.

Is this thematic backed by long-term tailwinds?

  • Avoid short-term fads which may lose momentum quickly.
  • Look for structural tailwinds which are backed by structural trends. For example, net-zero carbon emissions by 2050 targets are supported by numerous government policies and international initiatives.
  • Consider where opportunities can be unlocked along the value chain. Electric vehicle (EV) adoption in the coming decades will drive demand for critical minerals, so miners and producer of these green metals stand to benefit alongside EV manufacturers.

What is under the hood of this ETF?

  • Each thematic ETF tracks a rules-based index which selects a basket of stocks according to specific criteria to best capture a specific trend.
  • It is difficult to guarantee any one specific stock will benefit from a trend. In this way, thematic ETFs help to remove single stock risk because you are diversifying your exposure to a trend.

How do you compare thematic ETFs?

  • Take into consideration what your portfolio is already exposed to.
  • To avoid having multiple ETFs which have too much overlap, be sure to assess; what stocks are in the underlying index, how the stocks are weighted, the geographic spread, whether there are distributions and previous performance (bearing in mind past performance is not an indicator of future performance).
  • Management fees can play a role in your decision, but the priority should always be finding the best-in-breed ETF which will maximise your returns over time.

Has this trend already run its course?

  • Don’t jump on a thematic bandwagon once its already reached its peak valuations.
  • Find value by identifying trends which have a longer lead time. This will allow you to capture more capital growth.

The joy of thematic investing is being able to capture a specific area you truly believe or are interested in. It can open up a world of future-focused opportunities and add a strategic element of growth to your SMSF. Just always remember to keep in mind your risk profile and investment time horizon to make the most of thematic investing with ETFs.

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