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  • Writer's pictureMr H

Experiment 3: Thematic ETFs

Another day, another experiment. This time Thematic ETfs.

"What the who ETFS?"

If you've picked an Exchange Traded Fund to invest in, you've almost certainly come across a thematic ETF. They seem to be all the rage lately, but what actually are they?

Thematic ETFs are simply an ETF that sets itself up with rules to follow a certain theme for it's investments. For instance, if you want to invest in Global Renewable Energy, there's a thematic ETF for that. That thematic ETF will build up a portfolio of the biggest and best renewable energy companies in the world and you then buy the ETF knowing you are owning a chunk of the best in that industry.

It's pretty much the same as index investing but the index is designed around a popular trend or emerging technology or industry. It has even opened up to the market to some pretty quirky investment ideas. Here's two "outside the box" thematic ETFs that you can actually invest in (if that's your kind of thing!)

  • The Obesity ETF (SLIM) - Listed on the US Nasdaq, this ETF holds companies that tackle the ever burgeoning wastlines of the American population. they even have a holding in WW International, more commonly known as Weight Watchers!

  • Bloomberg Livestock ETN (COW) - I love the use of these tickers! As you would expect this ETN (Exchange Traded Note) specializes in livestock prices, particularly beef & pork. We've all seen the price of meat increase in the last couple of years.

So whilst these examples are a bit on the weird side of thematic ETFs, hopefully by now it gives you a good understanding of what they are.

"But are thematic ETFs wolves in sheep's clothing?"

One of the great levellers of the humble index tracking ETF is that it is a passive investment by its very nature, there is no active asset manager pretending he can consistently beat the market and claiming massive bonuses when luck goes his way and his picks outperform the market for 1 year (sometimes simply because he underperformed the year before).

Because there is no need for an active manager, ETF's can be sold cheaply, very cheaply.

Today, my biggest index ETF investment; Vanguard S&P 500 (VOO), charges just 0.03% per year. I currently have around R1.5m / $100k / £77k invested in VOO, it gave me a 15% return last year which is around R225,000 / $15,000 / £11,500 but those nice people at Vanguard only charged me R450 / $30 / £23 for the pleasure. Now that is true value for money right there!

But by their very design, thematic ETFs look a lot like passive index ETFs, they're based on a pseudo index that is built around a particular theme. But the majority of them are not passive investments, they are very much active investments and they have fees to match.

For example, SLIM & COW above have fees of 0.35% and 0.45% respectively. That is more than 100 times the fees from VOO.

So to get my money, It would need to be outperforming VOO consistently. Interestingly enough, SLIM produced a return of 10.67% in the last 12 months and COW is crying over the spilt milk (see what I did there?) and delivered a 12 month return of -22.4%, yes, that does say MINUS 22.4%!

VOO on the other hand has a 12 month return of 18.29%. Stick that up your active asset management!

So why would you invest in a thematic ETF?

To take an investor's ride on the hype-cycle my friends.

Allow me to explain. My investment in VOO is to get me exposure to the S&P 500. The 500 biggest and most successful companies in the US (which by design makes most of them global leaders e.g.. Apple, Facebook, Google). That's great and it makes it a pretty safe bet that over the long term returns will be plentiful and consistent (ish). However, what it doesn't really do is let you ride the wave of trends which can be super profitable in the short term. For example, Tesla only became part of the S&P 500 (and in turn, part of VOO) this month. However, on August 1 2019, less than 18 months ago, you could buy a share in Tesla for $45. This morning that share is worth $881 that is an 18 bagger (18 fold return) or 1800% return. I missed out on most of that because it wasn't in my index tracking ETFs. It is now but I would be surprised to see another 18 fold return from Tesla now (although never say never).

However, I could have bought many other thematic ETFs that did contain Tesla, in fact I did. I bought Sygnia's 4th Industrial Revolution ETF (SYG4IR) which has returned 89.47% in the last 12 months and is officially South Africa's best performing ETF in the last 6 months. It is actively managed in my opinion (this is debatable as it tracks in index, but it's a pretty obscure index) and the fees are pretty high at 0.59% but the theme is what is driving the great returns.

SYG4IR invests in new technologies like autonomous driving, work from home (e.g. Zoom), Bio Tech (e.g. Pacific Biosciences) and other equally geeky endeavours. I invested in it because I'm also a tech geek so I'm excited to own a share in these interesting companies. As a bonus, the returns have been amazing.

So reason number 1 to invest in thematic ETFs would be that you see a particular trend or industry that is about to explode and want to get in early and speculatively.

The second reason would be personal interest or belief. I'm a big believer in impact investing and social investing to try and make my money do some good in the world. I would consider a thematic ETF around ESG (Environmental, Social and Governance) to ensure I put my money where it will do the most good. In fact Sygnia just announced they are launching a thematic ESG ETF in February so I'll be having a good look at that.

So we've looked at both sides of the coin, it's clear to me that thematic ETFs have a specific use but are pretty high risk if they're highly specialised and in my opinion, should be seen as part of the "Fun Money" portfolio or at least be seen as a speculative investment that has some element of gambling built in.

Basically, they're a pretty Non FIRE thing to be investing in. So I'm going to do another experiment so you don't have to (you're welcome).

The Experiment

  • Pick 5 Thematic ETFs that are in fields I think are potential disruptors within a timeframe of 1-3 years.

  • Make a meaningful investment in each one

  • Hold them for 12 months and then measure success and publish your results

Simple is as simple does and this looks pretty simple to me. I'm a total geek so I already know they're going to be pretty much tech based.

The Investment

So by sheer coincidence, I was researching this experiment yesterday when my financial adviser "Pete" dropped me a check-in mail with his usual quarterly commentary on the state of the markets etc. which I find good at calibrating my own views against to make sure I am still in full grasp of my marbles. As part of his update, Pete introduced a company which specialises in tech based thematic ETFs.

Get outta my head man!

So this made my job significantly easier and what I expected to be a laborious few hours of trawling the interweb to search out thematic etfs that I could get excited about, I had a one-stop candy shop in front of my eyes and I was ready to feast!

So here are my 5 thematic ETF picks for this experiment:

  1. Ark Innovation ETF - ARKK - Investment: R9,000 / $600 / £460 - This is the most broad of my picks and is simply defined as a "Disruptive Innovation" ETF. It is actively managed with fees of 0.75%, so let's hope the manager knows what he's doing! Top holdings that you would recognise include Tesla (electric cars), Roku (TV Boxes) , Square Inc (eCommerce) & Spotify (Music Streaming). I have to admit this one leaves me feeling like I may be a little late to the party as it delivered an eye watering 153% return in the last year, assumably most of that was down to Teslas meteoric rise which in my opinion has left it over valued. However, that is why we do experiments and my recent Tesla purchase via the new FNB ETNs has already delivered a 43% return in the last 6 weeks so maybe there's still some "Charge in the batteries" (sorry, that was just bad)

  2. Ark Autonomous Technology & Robotics - ARKQ - Investment R8,445 / $563 / £433 - Now We're talking! I like nothing more than a good robot and who doesn't get excited about the thought of truly autonomous cars. This is the stuff of every sci-fi film i grew up watching. As you would imagine Tesla is again the biggest part of this ETF but there are some slightly more obscure investments like Materialise (3d printing leader) and Kratos (defence & Security technology). This ETF seems to lean more toward manufacturing technology rather than the actual robot producers who have massive R&D spend with sometimes zero returns so that gives me comfort. Returns in the last 12 months were 106.7% and fees are again 0.75% so I suspect the success of Tesla again will play a part here.

  3. Ark Next Generation Internet ETF - ARKW - Investment: R10,200 / $680 / £523 - This is all about big data and companies leveraging their massive online customer base for monetisation. there is some overlap here with ARKK and guess what, Tesla features again (spotting a trend yet?) but additions like Facebook, Netflix and even a little exposure to Bitcoin make this an interesting play. 12 month return of 157% and a fee of 0.76% makes this a high risk play especially with the recent massive run on Bitcoin.

  4. Ark Genomic Revolution - ARKG - Investment: R10,110 / $674 / £518 - This is essentially a health tech investment and gets into things like Molecular Diagnostics and Bioinformatics (what?) . This is the area I know the least about but given the current pandemic, I'm betting it's an area that will emerge more quickly than it would otherwise. I don't recognise one company in it's top 10 but it's biggest investment is in Teladoc which Google tells me is a virtual healthcare provider. I recently did an online consultation with my doctor for the first time so it's definitely an area seeing adoption. 12 month return is a massive 180% and fees are 0.75%

  5. Ark Fintech Innovation - ARKF - Investment: R8,385 / $559 / £430 - This is right up my street, I am an active early adopter of Financial technology and love nothing more than a good investing or share dealing app! As you would expect, companies like Paypal are included here but also some I wouldn't expect like Pinterest and Tencent. 12 month return has been 108% and fees come in at 0.75%

And that's the hopefully soon to be Famous 5.

Investments have been made, trackers have been created and now it's sit and wait and see if actively managed thematic ETFs with high fees are actually a good investment or not. I genuinely don't have a feel for this one. I think all the themes I've chosen are topical, high energy and disrupting the status quo so they could do really well. However, there is no doubt in my mind that I have literally just gambled R46,000 / $3,000 / £2,350 on this experiment. there is no dressing this thing up as a long term FIRE style passive investment. This is flying by the seat of your pants, not for the faint hearted investing. However, with great risk comes the possibility of great rewards so we're doing this in the name of science.

I feel like I should end this post by reminding my readers that I am not a qualified financial adviser, nothing I write on this blog should be construed as advice and you should take professional advice before making any investment. Do your own due diligence! I now own all the shares mentioned above.

With that out of the way, I'm quite excited about this one and that's 3 experiments set-up in the lab for 2021. As always I'd love to hear your views on thematic ETFs and if you think they are a good investment or they are passive index investing imposters. Hit the comments section below if you have a view to share.

Until next time, keep living.

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Mr H
Mr H
Feb 01, 2021

Hey Charlie, it's a good point I hadn't really considered, a profit isn't a profit until it's in your bank account!

I've actually been reflecting a bit about this topic since I wrote the post last week and I think I actually might want it to fail.

The whole Gamestop / Robinhood / Marketbets thing got me thinking about it and I'm getting really worried about the amount of "Vapourware" out there that's generating money that doesn't yet (and may never) exist. Pretty much all of my thematic investments are based on future "possibilities" and not a track record of great leadership and consistent delivery.

That compounds the problem you describe as when the roller coaster stops and everyone tries…


Feb 01, 2021

I've liked the concept of thematic ETFs and also the index ideas behind ETFs. My concern on many of the smaller ones is the liquidity and what happens when there is stress in the underlying shares.

For example, there are preference shares that have no liquidity, so instead of buying a preference share from one of the banks, I can instead just buy the ETF instead.

In normal times it's great, the market makers can issue and with the buy/sell spread reflect the prices to obtain the underlying assets. My worry is there must be consequences for the ETF when the underlying shares are under stress, and there is no liquidity. What happens to the ETF itself if the investor…

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