As exchange-traded funds (ETFs) rise in popularity among institutional investors, innovative thematic ETFs have emerged, ranging from familiar themes such as gold and sustainability to others like cryptocurrency and blockchain.
Midway through 2021, overall ETF flows are already close to last year’s total levels. As of June 21, US-listed ETFs captured $434 billion in net inflows, compared with the entire 2020’s $487 billion, according to FactSet Research.
In response to the demand, a broader range of thematic ETFs has emerged, allowing investors to capitalise on emerging trends such as Bitcoin and blockchain, while lowering risks.
For instance, US-based asset manager Viridi Funds launched the Viridi Cleaner Energy Crypto-Mining & Semiconductor ETF on Monday (July 19). The fund invests in companies in the cryptocurrency mining industry that have sustainable environmental, social and governance (ESG) policies.
Region-wise, thematic cryptocurrency and sustainable ETF strategies have generated particular interest from mainland China, Hong Kong and Taiwan investors, according to a 2021 Greater China ETF Investor Survey published by private investment bank Brown Brothers Harriman.
Gold ETFs have also been popular in Asia. As of end-June, Asia-domiciled gold ETFs posted net inflows of $1.6 billion, making it the only region to register net inflows. China, India and Hong Kong-domiciled gold ETFs have been the main driver of the inflows.
In contrast, there were significant outflows from the funds in the US and in Europe, with total net outflows reaching $8.5 billion and $3.6 billion respectively over the same period, according to Morningstar data.
ETF returns have also shown promise. For example, the Invesco Elwood Global Blockchain UCITS ETF made a year-on-year return of 123.8% in June, outpacing iShares Core S&P 500 UCITS ETF's’ 40.4% return in the same period, according to research firm ETF Data Base.
We asked experts which thematic ETFs have received rapidly growing interest and their return performance highlights.
The following responses have been edited for brevity and clarity.
Wang Yi, head of quantitative investment
CSOP Asset Management
Cloud computing is the leading growth driver for most of the tech giants in the US market, which has been further confirmed by recent reported financial figures. With the uncertainty of Covid-19, the industry will further expand with solid foundations and demands. China is still lagging behind the US market in the Cloud market, however, we see huge potential to catch up in the long run.
Other themes such as solar photovoltaic and 5G are also worth a dig. China is leading the photovoltaic industry across the whole industry chain and is commercially competitive within the energy sector.
China’s carbon omission target makes the ESG investment theme more solid from a policy stability point of view. The theme is performing very well recently which is mainly driven by the policy environment and press focus.
However, the recent performance of the 5G theme is not as good as expected. The 5G infrastructure investment has fallen behind within China due to the slowdown in the aggregate level of government spending. The situation might be changed in the second half of the year with local government funding in place.
Jacqueline Pang, head of ETF sales for Asia Pacific
HSBC Asset Management
In Asia, sustainable investing is gaining traction and investors' discussion comes in different phrases. It is no longer a question of “why should we?”, but rather “how should we incorporate?".
Across the spectrum ranging from asset owners, insurance, pension funds and private banks, we see that investors are getting serious about sustainability and putting their concerns into action by integrating ESG into their investment criteria.
We also are seeing real money; investors are putting restrictions on names they can invest in due to ESG concerns. The strong demand for ESG investment and the lack of ESG offerings in the region serve as incentives for many asset owners to launch relevant ESG products.
Thomas Kwan, chief executive officer
Harvest Global Investments
We are most attracted to China A-share ESG ETFs and have launched Harvest CSI 300 ESG Leaders Index ETF in Hong Kong in March. It meets global investor demand amid growing appetite for both ESG / sustainable investing and China onshore equities.
ESG analysis helps investors identify sustainable growth opportunities among leading Chinese companies when the country pursues quality growth and pledges to achieve carbon neutrality by 2060. .
Application of ESG integration is still unsound for active fund managers in Asia. A passive ETF strategy ensures ESG integration is consistently applied.