Whole industries as well as individual companies can rise and fall on the strength of the macro trends that are shaping our future.
Changes such as the ageing population, climate change, emerging markets, and threats to cybersecurity can give rise to powerful forces with potential to reshape the economic landscape.
Thematic investors seek to structure portfolios around these emerging trends by investing in assets that are likely to benefit from prevailing macroeconomic forces.
Other popular themes include emerging markets, with the MSCI Emerging Markets Index increasing by 8.62% annually (from 2000 to 30 September), and climate change, which is predicted to cost the world’s largest public companies nearly $5 trillion over the next 5 years.
Fund managers will use these broad themes to pick stocks in sectors which they believe will outperform over time. Whilst this doesn’t mean that all companies can be shoehorned to fit within a theme, themes can offer useful guidance as to how to leverage your investment spend.
Many exchange traded funds (ETFs) now offer the opportunity to gain exposure to macro level trends in a single trade. When assessing a thematic ETF it is important to understand the underlying index that the fund is seeking to replicate. Care should also be taken to assess the stocks which make up the underlying holdings of the fund. Management fees should be taken into consideration as these will reduce potential returns.
Below, we take a closer look at 4 thematic ASX ETFs that investors can leverage to gain exposure to some of the biggest trends influencing tomorrow.
The iShares Global Healthcare ETF (ASX: IXJ) offers exposure to healthcare stocks from around the world in a single trade. With investments in companies spanning the biotechnology, pharmaceutical, and medical device sectors, the fund tracks the S&P Global 1200 Healthcare Sector Index. Five year returns on the fund were 12.16% to 30 September and management fees are 0.47%. Distributions are made twice yearly.
As at 30 September the price-to-earnings (P/E) ratio of the fund was 25.13 and the 12 month trailing yield was 1.58%. Top holdings are Johnson & Johnson (6.86%) a healthcare consumer product and medical device company listed on the NYSE, and Novartis AG (4.44%), a pharmaceutical and generic medicines provider listed on the Swiss Stock Exchange.
Other holdings include Merck & Co Inc (4.33%) a pharmaceutical company listed on the NYSE, UnitedHealth Group Inc (4.13%) a health insurance and services provider listed on the NYSE, and Medtronic (2.92%) a medical technology company listed on the NYSE.
BetaShares Global Sustainability Leaders ETF (ASX: ETHI) provides exposure to 100 ex-Australian companies that have been recognised as ‘climate leaders’ based on relative carbon efficiency. The fund tracks the performance of the NASDAQ Future Global Sustainability Leaders Index after fees.
Returns over the year to 30 September were 13.76% and the P/E ratio of the fund was 29.04. Management fees are 0.49% per annum with expenses are capped at 0.10% per annum. Distributions are made twice yearly.
To be included in the fund, companies must pass ethical exclusion screens. Companies with exposure to fossil fuel, gambling, animal cruelty, armaments, destruction of valuable environments, uranium/nuclear energy, junk food, pornography, alcohol, and human rights or supply chain concerns are removed. The fund is recognised as a responsible and ethical investment by the Responsible Investment Association Australasia.
Top holdings are Apple (4.7%, listed on the NASDAQ), Home Depot, the American home improvement retailer (4.4%, listed on the NYSE), MasterCard and Visa (4.2% and 4.1%, respectively, both listed on the NYSE), and Roche Holding (3.9%), the pharmaceutical and diagnostics company listed on the Swiss Exchange.
The Vanguard FTSE Emerging Markets ETF (ASX: VGE) invests in shares in companies located in emerging markets around the world, including China, Taiwan, South Africa, and Brazil. The fund aims to track the performance of the Emerging Markets All Cap China A Inclusion Index after expenses. Returns in the 5 years to 30 September were 6.63% per annum. Management fees are 0.48% per annum. Distributions are paid quarterly.
The fund holds stocks in more than 5,000 companies and had a P/E ratio of 12.9 as at 30 September. Of the fund’s holdings, 35.2% were located in China, with 14.2% in Taiwan, 10.8% in India, 8.5% in Brazil, 5.3% in South Africa, and 4% in Russia.
The largest 10 holdings of the fund constitute 19.90% of the portfolio. The number one holding of the fund is Tencent, the Chinese gaming, social media, and technology conglomerate. Other top 10 holdings include Alibaba, which specialises in e-commerce, Taiwan Semiconductor Manufacturing, which manufactures semiconductors for Apple, amongst others, and China Construction Bank.
Betashares Global Cybersecurity ETF (ASX: HACK) provides tactical exposure to the global cybersecurity sector. The fund aims to track the performance of the NASDAQ Consumer Technology Association Cybersecurity Index before fees and expenses.
Returns in the 3 years to 30 September were 16.59% and the P/E ratio was 24.19. Management costs are 0.67% per annum and distributions are made twice yearly. Holdings are predominantly US based (82.4%), with Israel (6.1%), Britain (5.1%), France (3%) and Japan (3%) also represented.
Cloud computing company VMware is the number one holding with 6.8% of the fund, with Palo Alto Networks, a cybersecurity and fireball provider a close second with 6.6%. Other top holdings include Broadcom, a semiconductor and infrastructure software provider (6.1%), Cisco Systems, a networking and telecommunications hardware provider (6.1%) and Okta Inc (5.1%), which provides user identity and access management solutions.
With so much market data available at our fingertips, sometimes it can be hard to take a step back from earnings updates and profit downgrades to take a broader view. Macro level trends can have a significant impact on investment returns over the long term. Impacts can be widespread, revolutionising whole industries.
Luckily, with the rise of ETFs, it seems if there is a trend to track, there will be an ETF for that.
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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of BETA CYBER ETF UNITS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.