In this news, we discuss the Analysis: Pawz and UFOs: Boom in Thematic ETFs, Attracting Bettors and Concern


LONDON (Reuters) – From from cat food to cannabis, it’s time for the original ETFs to move into niche themes in fast-growing sectors, but their huge gains baffle some who see them as another price-inflated asset that could threaten the market. market stability.

While Reddit’s “gamestonks” have made recent headlines, retail investors are also credited with large flows to exchange-traded funds – essentially a basket of tradable stocks – increasing their assets by over $ 1 trillion. dollars last year, according to Refinitiv.

And the growth has been particularly noticeable in ETFs that aim to tap returns from themes that capitalize on societal and economic trends, from space travel to pet care, from marijuana to medical technology.

These ETFs, which are bought and sold like stocks, more than doubled their assets under management last year to $ 140 billion, says Citi analyst Scott Chronert, describing the entries as having become “almost parabolic.” .

Thematic ETFs in EMEA alone have so far received $ 4 billion this year, according to the bank, a figure which Chronert said would increase “as investors continue to demand more precise positioning.”

The ARK Innovation ETF, which contains trade disruptors Tesla, payments firm Square and genome publisher Crispr Therapeutics, has risen 350% since last March, while ETFs Procure Space and ProShares Pet Care have also posted gains sparkling prizes.

The iShares Global Clean Energy ETF has risen 275% in the meantime, and cannabis-themed ETFs have had an exceptional experience believing the new US administration will decriminalize the drug.

Chart: Thematic ETFs on fast growing sectors increase –

eToro said it saw a more than 400% increase in the opening of ETF positions globally on its platform last year, as part of a general trend of ‘tremendous growth’ in investment Retail.

“It is easier to invest in themes than particular stocks or larger indices and so disruptors in technology, games, biotechnology, have become very popular with retail investors,” said Deborah Fuhr, co-founder of the firm. ETFGI advice.

And this despite higher fees – deposits show ETF Ark Innovation charges 0.75% versus 0.04% for Blackrock’s S&P 500 core ETF.

Thematic ETFs are still only a tiny fraction of the $ 8 trillion exchange-traded product industry. So why are some investors warning about stability risks?

Part of this is due to what short seller Carson Block, founder of Muddy Waters Capital, calls the “autopilot” model of passive investing – buying more stocks as its price rises and its weight increases. index increases.

But when cash outflows do occur, the ETF provider has to sell stocks to deal with redemptions, which can trigger a chain reaction when the stock price drops. This passive selling could “quickly overwhelm the market,” Block warned in an FT column this week.

The risk can be magnified in thematic ETFs that focus on only a handful of names. ARK Invest, which owns the Ark Innovation ETF, holds for example more than 10% of the outstanding shares of certain companies, in particular biotechnologies, note analysts at Saxo Bank.

Ark Invest was not immediately available for comment.

Sébastien Lemaire, head of ETF research at Société Générale, also affirms that the pace of flows could be worrying.

“Some of these ETFs that have seen record inflows are rather focused on a relatively small number of constituents.”

Any reversal, caused by the change in ETF positions due to investor exits or index rebalancing, could lower the prices of shares of smaller constituents with lower trading volumes.

Within the ARK Innovation ETF, January daily trading volumes on streaming platform Roku Inc and virtual healthcare provider Teladoc averaged around three million shares and 500,000 shares respectively, well below the eight million units of the underlying ETF.

And holdings also overlap between funds. Tesla is present in no less than 27 thematic ETFs, notes Citi, while chipmaker Nvidia arrives in 45.

Thematic ETFs continue to grow, with 17 launched in Europe last year, while US ETF specialist Global X launched six globally, focusing on sectors ranging from gaming to telemedicine, according to the company. Morningstar fundraiser.

The concentration of risk can be even more extreme in “three times long, three times short” exchange-traded strategies, where the gains – or losses – can be three times greater than the stock’s performance.

UK-based Graniteshares, which offers 3x long, 3x short exposure to 10 US tech stocks and 10 UK blue chips, claims that $ 40,000 invested in its exchange-traded product Tesla 3x long when it launches in July 2020 is worth now $ 1 million.

Morningstar, while acknowledging recent skyrocketing returns, said its research shows that thematic funds “have always struggled to outlast and outperform global stock indices over longer periods of time.”

Graphics: expensive and concentrated –

Reporting by Saikat Chatterjee and Thyagaraju Adinarayan; edited by Sujata Rao, Kirsten Donovan

Original © Thomson Reuters

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