Thematic ETFs: Smarter Than Regular Smart Beta ETFs?

It’s been a true transformation for the ETF industry over the last few years. With a size of $3.137 trillion, the global ETF industry hit a record at the end of April 2016. The U.S. market alone boasts a size of over $2.2 trillion, derived from over 1,890 exchange traded products.

While this joy-ride is something to delight in, crinkles of worries must be there on the foreheads of issuers. After all, with such gigantic and successful progress, ideas of new issuances are likely to fall short. There is always pressure for beating the benchmark, navigating tough trading times and last but not the least peer pressure.

Simply put, the days of plain vanilla ETFs or market-cap weighted ETFs are gone and products with several wining attributes, like low volatility or high dividend, are coming on-stream. Commonly, these next generation ETFs are called smart-beta ETFs.

But it seems that the lure for smart beta investing is also diminishing these days. Beating the benchmark on a sustainable basis is tough in the present global backdrop that is fraught with issues. Plus, first-time craze also ebbs when a new investing theme turns older.

Probably, this is why issuers are fine tuning the smart beta concepts to make them smarter. For example, Goldman Sachs introduced the ActiveBeta Index concept, Global X has a suite of scientific beta ETFs and so on.

In fact, to make things more competitive and take them a few notches higher, Global X got itself busy in promoting the Thematic investing and launching more products based on it.

Inside Thematic Investing

As per Global X, its family of thematic ETFs looks to track companies that reap returns from “structural changes in people and demographics, technology and innovation, and natural resources, along with companies that exhibit a particular set of desirable values.”

As we can see that the above-mentioned criteria is long-term in nature and less susceptible to sudden changes in economic policies of various countries or a sudden jerk in the market emanating from some geo-political crisis. Instead, these factors look to cash in on some emerging trend in the global economy. As an investor, if you have faith in a particular segment over the long term, only then you should go ahead with that product.

As of now, Global X has four categories in its thematic investment, namely technology, resources, values and people. Not that these ideas are fool-proof as products in technology and resources segments piled up losses previously; but new entrees in people and values segments seem striking at the current level. We’ll tell you why.

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