Is Thematic Investing the New Stock Picking?
15 March 2024
- Selecting stocks is difficult for retail investors in efficient markets
- By contrast, thematic ETFs offer the opportunity to back a theme or megatrend
- This may explain why assets in thematic ETFs are growing
It won’t have escaped anyone’s attention that soaring military spending has boosted defense stocks. Yet while the pickup in defense orders at a time of heightened geopolitical tensions is an obvious trend, the share prices of some leading US defense contractors have not benefited.
Why? Because legislative deadlock in Washington has created government spending uncertainty. That has left shares in big US defense contractors like Lockheed Martin and RTX (formerly Raytheon) languishing. Meanwhile, shares in European companies like Italy’s Leonardo and Germany’s Rheinmetall have almost doubled1. For retail investors, this highlights the difficulties of picking individual stocks and the advantages of thematic investing through ETFs. An investor who would have invested in a single name to make a play on the theme could have either won big or missed out on returns completely.
In contrast, investing in VanEck’s Defense UCITS ETF, diversified across at least 25 companies would have helped the investor to capture returns of the industry, while avoiding risks associated with excessive concentration. Since its inception in March 2023, it returned 45.2% (with the annualized 3-year return of its underlying index at 19.1%)—rewarding those investors who had the foresight to invest2. In fact, global defense spending jumped 9% in the year to reach a record $2.2tn, according to the International Institute for Strategic Studies.
Competing With Efficient Markets is Hard
Investing in single stocks could be a risky business for most retail investors. Truly understanding the investment fundamentals of a company involves intense analysis. What are sales, cashflows and profits likely to be over the years to come? How valuable are a company’s assets? Is all this accurately discounted in the stock price valuation? Getting a better insight into a stock in what’s a fairly efficient stock market is a difficult game, even for expert professional investors.
By contrast, thematic ETFs are tools that allow retail investors to back a trend. To give another example, it might have been obvious to conclude that semiconductor companies would benefit from the generative artificial intelligence boom. But not all chip companies are equal. While Nvidia’s price has shot higher, Intel’s has floundered. An investment in a thematic semiconductor ETF, however, would have averaged out the winners and losers (see chart).
Not All Semiconductor Stocks Are Equal
Source: Bloomberg. Past performance is not indicative of future returns. It is not possible to invest directly in an index.
There is some criticism of thematic ETFs because they encourage investors to back short-term trends, which can be unpredictable. Investing tends to reward long-term patience, rather than short-term momentum trading. Normally, the way to use thematic ETFs is to identify the longer-term trends that one believes in and then invest in them on the periphery of your portfolio - an allocation of up to 10% is usually enough.
An Innovation Whose Time Has Come
In my opinion, just as broad ETFs have been hailed as a brilliant innovation for broadening investor democracy, in a similar way thematic ETFs could allow retail investors to express their views about long-term trends. Well-informed retail investors are in a good position to take a view on themes like the ageing population, the energy transition and so on.
As more people back their views on such megatrends, investments in thematic ETFs are growing. The latest data shows assets up by more than a fifth in the first 11 months of 2023 to reach $268 billion, according to research company ETFGI.3
For retail investors who prefer to stay away from the complexities of backing single stocks, thematic ETFs could fill the gap. To answer the question in the title of this blog, thematic investing may well come to be seen as the new stock picking.
1 Source: Bloomberg. Past performance is not indicative of future returns.
2 Past performance is not indicative of future returns. Investors in the product should consider risks of investing in VanEck Defense UCITS ETF, including, but not limited to sector concentration risk and risk of investing in companies in the industrials sector before investing. Investors should give higher weight to strategy’s long-term returns when evaluating fund performance.
IMPORTANT INFORMATION
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
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VanEck Asset Management B.V., the management company of VanEck Defense UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company incorporated under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
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Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck (Europe) GmbH / VanEck Asset Management B.V.
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