Thematic ETFs are not portfolio building blocks but you could have a small allocation to them July 12, 2021

By Dave Baxter
• Thematic funds highlighted by the IC Top 50 ETF panel
• The risks and rewards of topical areas such as blockchain and agriculture

The bumper year thematic funds had in 2020 is not reflected in the 2021 IC Top 50 ETFs, for good reason. This list focuses on more conventional tracker funds that work well as the building blocks of an investment portfolio, so it only includes four thematic exchange traded funds (ETFs). We also remain cautious about holding thematics as the mainstay of a portfolio due to their serious drawbacks and the substantial due diligence required before you buy them and while you hold them. Thematics are not necessarily ‘sleep easy at night’ products.

But as many investors still view them as an exciting prospect, we have highlighted the thematic ETFs that most excited the IC Top 50 ETF expert panel this year. But these are only suggestions to inspire further research, not recommendations to buy.

Topical picks and new suggestions

Our panel reiterated some of the thematic ETF suggestions they made last year, including EMQQ Emerging Markets Internet & Ecommerce UCITS ETF (EMQP), HAN-GINS Tech Megatrend Equal Weight UCITS ETF (ITEP) and iShares Healthcare Innovation UCITS ETF (DRDR).

Some of these funds seem more topical than others. With cryptocurrencies and their underlying technologies attracting attention, Peter Sleep, senior investment manager at 7IM, suggested Invesco Elwood Global Blockchain UCITS ETF (BCHS). This fund offers exposure to companies in developed and emerging markets, which “participate or have the potential to participate in the blockchain ecosystem.” If you feel uneasy about the volatility associated with cryptocurrencies but believe in the technology behind them, this could be an interesting theme.

Invesco Elwood Global Blockchain UCITS ETF has rewarded investors so far. Between its 8 March 2019 inception and 6 July 2021, it made a total return of 167.4 per cent in sterling, significantly outpacing iShares Core S&P 500 UCITS ETF’s (CSP1) 54.5 per cent return. For now, the blockchain ETF has paid off handsomely versus a broad play on the world’s leading equity market.

Invesco Elwood Global Blockchain UCITS ETF had 50 holdings on 6 July 2021 with more than a third of its assets in the 10 largest of these. Some of these might be familiar if you follow crypto markets. Coinbase Global (US:COIN) was the fund’s ninth-biggest holding on 6 July, representing 3.4 per cent of its assets, and bitcoin computing centre specialist Bitfarms (CAN:BITF) was also in its top 10 holdings. The fund’s biggest position was South Korean internet giant Kakao (KOR:035720), with Taiwan Semiconductor Manufacturing (TAI:2330) and trading firm CME (US:CME) also among its top holdings.
But, as with many thematic funds, you may find some of its holdings fairly mainstream. For example, (US:AMZN), Tesla (US:TSLA) and Samsung Electronics (KOR:005930) are also holdings. As with many early-stage thematic funds, it may become a purer play on its theme once the related industry matures. Thematic funds can hold liquid stocks that seem indirectly related to a theme as ‘placeholders’ until more suitable companies emerge, a case in question being Ark Space Exploration and Innovation ETF (US:ARKX) (see IC, 2 April 2021).

Invesco Elwood Global Blockchain UCITS ETF has amassed a huge chunk of assets but like some other thematic funds has a fairly high price tag for an ETF, with an ongoing charge of 0.65 per cent.

Semiconductors to agriculture

Other names highlighted this year play well into the themes of tech and the continued rise of ecommerce, even if some of their holdings are also held by more mainstream funds.

VanEck Vectors Semiconductor UCITS ETF (SMGB) provides exposure to a sector in extremely high demand. This very concentrated fund recently held just 25 stocks, the three largest of which accounted for around a third of its assets – Nvidia (US:NVDA), ASML (NETH:ASML) and Taiwan Semiconductor Manufacturing. Other top holdings include Intel (US:INTC), Texas Instruments (US:TXN) and Qualcomm (US:QCOM). These stocks are also likely to be held by technology, US and global equity funds, but VanEck Vectors Semiconductor UCITS ETF could be held as a satellite position in a portfolio.

There has been a notable scarcity in semiconductor chips and more generally they are an essential component for many high-growth sectors. Yet this sector can be volatile: if growth stocks falter, semiconductor companies can take a hit. Even in its short life, VanEck Vectors Semiconductor UCITS ETF has had a fairly volatile ride.

Also on topical note, one panellist suggested iShares Agribusiness UCITS ETF (SPAG), a portfolio of around 75 agriculture businesses. Though worlds apart from the semiconductor industry, it has still benefited from similar developments in its recent history. Commodities have had a boost in demand, turbocharging this fund’s recent returns. But although iShares Agribusiness UCITS ETF is spread across 75 holdings, it can still look pretty concentrated. For example, its largest holding, Deere (US:DE) a US manufacturer of agriculture machinery, represented a tenth of its assets on 6 July. And the next three largest positions each made up more than 7.5 per cent of the fund’s assets.

But iShares Agribusiness UCITS ETF could be held as a less volatile alternative to a pure commodities ETF. It has lagged the huge gains of Invesco Bloomberg Commodity UCITS ETF (CMOP) so far this year, but managed to make a positive return in 2020, a year in which the Invesco fund made a loss.

A related name, Rize Sustainable Future of Food UCITS ETF (FOGB), may appeal if you are looking to invest more sustainably or ethically. It seeks exposure to companies that are “innovating across the food value chain to build a more sustainable, secure and fair food system for our planet”. It had 45 holdings on 8 July, with sustainable packaging, plant-based foods and precision farming among the sub-sectors targeted by the fund. A holding that may be familiar is Beyond Meat (US:BYND).

Although we may not have highlighted these ETFs before, some of them have been around for a while. It is often a good idea to allow a fund to develop scale or for its target industry to reach further maturity before investing.


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