Thematic investing and using it in your portfolio

might also consider companies outside of this sector classification which also stand to benefit by providing services associated with technology, such as Amazon or Netflix.

Investors should be cautious when identifying trends to invest in – the key is to avoid passing fads or themes that may only be short-lived.

Themes should be:

Universal rather than specific to just one com-pany or region¹.

Sustainable over longer periods, in some cases 20 years or more.

Based on known patterns and pressures².

Thematic investing is more than a buzzword. It describes how to expose your portfolio to some of the major socioeconomic, environmental and technological themes of our times in a tailored way. While most may be well attuned to the basics of investing and diversifying across asset classes, investing in thematics is a newer concept.

Thematic portfolios follow a top-down approach to investing. They look at long-term macro trends, such as robotics and automation, and then use various screens and information sources to iden-tify the companies or assets which support this trend through infrastructure or services.

Thematic investing is sometimes confused with sector investing. While it’s easy to see how this can happen, thematic investing is more tailored and can span several sectors or even asset class-es. To illustrate this, consider the growth trend for technology. While one way to incorporate this might be simply including a sector investment toinformation technology, a thematic investment

1

What is thematic investing?

ThematicInvesting

Identifying the ‘right’ themes and trends

2

trend is likely to continue given the challenges faced by traditional media channels like television and newspapers. E-marketing is becoming increasingly targeted, with algorithms making use of cookies to serve up personalised advertising. Big data has also played a role, with companies like Facebook, Google and Baidu able to capitalise on the extraordinary volume of data they hold, identifying trends and patterns of behaviour that will accompany certain buying habits and on-selling this information to other retailers and suppliers.

The movement towards digitisation has also come with increased risk to privacy and security. Cybersecurity is a big business, with cyberattacks becoming more sophisticated and with the power to disrupt businesses and governments. In early 2020, Toll Group was hit by a targeted attack forcing it to shut down much of its operations and causing delays to customer deliveries6. Several official state websites in Greece were also briefly disabled by an attack in January 20207.

People looking to invest in this theme could con-sider investments that focus on sectors like technology, subthemes like robotics and artificial intelligence or even those that identify top innova-tive companies broadly. An example of this is ETFS ROBO Global Robotics and Automation ETF (ASX Code: ROBO).

Some examples of well documented themes:

Biotechnology has experienced extraordinary growth in recent times and come to popular atten-tion as companies race to find vaccines and cures for COVID-19.

Biotechnology specifically refers to technologies that use biological processes, capturing com-

Biotechnology

Faster and cheaper internet access, along with the unexpected changes wrought by the COVID-19 pandemic, have seen the world increasingly move interactions and consumption online. It is estimat-ed that nearly 60% of the world’s population are internet users³, embracing social media, streaming services and online shopping. The internet is rapidly becoming an essential tool of modern life, required for business processes, data storage and even supporting lifestyle improvements via automated devices. The current roll-out of the 5G network worldwide will further support this movement. It is predicted that around 500 billion devices will be connected to the inter-net by 20304.

Looking at current technology and use, a range of industries have been able to take advantage of the opportunities from this shift online.

Retailers and suppliers can access and service customers all over the world from one base loca-tion which has cost savings in terms of bricks and mortar space as well as staff. Companies that were slow to move online have suffered, with a number of traditional department stores prime examples of this. This has been a space ripe for disruption and the Amazons and Alibabas of the world have set the standard for expectations of ecommerce experiences. The race continues to offer even better experiences in terms of product and delivery.

These companies in turn need ways to target cus-tomers, opening the door for digital marketing. Digital ad-spend overtook traditional media adver-tising in the US for the first time in 20195, and this

Virtual connectivity and digitisation

Virtual connectivity

Ecommerce

Biotechnology

The growth of the middle-class in Asia

Climate change

ASX Code ROBO

Bloomberg Code ROBO AU Equity

Benchmark ROBO Global® Robotics and Automation Index 

Management Costs (%pa) 0.69

Expense Recovery (%pa) 0.13

Rebalance Frequency Quarterly

Distribution Frequency Annually

W-8 BEN Form Required No

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panies that focus on research, development, manufacturing and/or marketing of products based on biological and genetic information. The different types of biotechnology include biological drugs, vaccines, immunotherapy, gene therapy, orphan drugs and genetic engineering.

People looking to invest in this theme could con-sider investments that focus on the broad health-care sector or focus specifically on biotechnolo-gy. An example of this is ETFS S&P Biotech ETF (ASX Code: CURE).

Biotechnology is predicted to be valued at more than US$729 billion by 2025, compared to US$417 billion in 20188, and will continue to grow, driven by the growing global population and the need for affordable, effective treatments and vaccines to support treatment in the population.

Biotechnology will also be a beneficiary of popu-lation aging, particularly in Western countries. The reason for this is that an increase in the volume of older citizens is likely to have an accompanying and proportional increase in the volume of age-related diseases such as cardio-vascular disease, dementia or arthritis, all need-ing treatment9.

Gilead is one example of a company with pros-pects in this space. Gilead is already well-known for its highly effective HIV treatments but is also targeting US and European approvals to market a drug called Filgotinib to treat rheumatoid arthritis¹0.

In a demonstration of the growth in this industry, this year alone, 30-35 biotechnology companies are anticipated to go public, raising approximately US$3.5 billion¹¹.

The healthcare sector as a whole is likely to see greater investment as a result of the COVID-19 pandemic. For example, national health spending growth in the US is expected to average 5.4% annually through 2028, reaching US$6 trillion a year¹². Biotechnology will also be a beneficiary of this increased investment.

The growth of the middle class across Asia has been well documented for years. The Organisa-tion for Economic Co-Operation and Development (OECD) estimates that households with daily expenditures of $10-$100 per person would swell to 4.9 billion people by 2030, with two-thirds residing across Asia¹³. The region is anticipated to be responsible for 52% of global gross domestic product (GDP) by 2050¹4.

Traditionally, China has been the primary focus but its economic slowdown as it moves to a consumption-driven economy, along with political concerns, such as trade with the US, have led many to look to alternatives. India, for example, is expected to see the percentage of households in poverty drop from 15% to 5% by 2030¹5 and its population is set to overtake China by 2024¹6.

The movement of people to higher financial status represents a huge opportunity. It is an audience with the ability to afford more than just the basics and demand better quality. At a base level, manufacturers of higher quality consumer staples can benefit from this demand. For exam-ple, a middle-class audience is more likely to purchase well-known brands or consider organic foods over mass-grown options.

The opportunity extends across industries. A middle-class audience has excess cash to con-sider travel, education, healthcare, medical needs, luxury goods and technology. Universities and

The growth of the middle-class in Asia

Manufacturing Marketing

R&D

CURE

Monoclonalantibodies

Vaccines

Gene therapy

Gene editing

CURE

Immunotherapy

ASX Code CURE

Bloomberg Code CURE AU Equity

Benchmark S&P Biotechnology Select Industry Index

Management Costs (%pa) 0.45

Rebalance Frequency Quarterly

Distribution Frequency Annually

W-8 BEN Form Required No

Ongoing population growth and climate change are placing pressure on available resources including minerals, energy, water and food sources. Global energy consumption is anticipated to more than double in the next 30 years²0, while water shortages could affect more than 5 billion people by 2050²¹. This is forcing an evolution in how we use energy and water, both at an individual and an industrial level.

Wind and solar energy are forecast to supply around 48% of world electricity needs by 2050, with battery technology, gas peakers (turbines or

Investors interested in this theme could look at investments focused on clean energy, those that incorporate specific environmental filters or

Climate change

4

engines that burn natural gas) and dynamic demand anticipated to drive market penetration of solar and wind by more than 80% according to BloombergNEF²². The same report also suggests the costs of renewable energy will undercut coal and gas in most parts of the world by 2030 – a compelling reason for countries to focus on it.

The transition to renewable energy sources has supported other industries, such as the battery technology supply chain to assist with energy storage. The value chain for battery technology ranges from mining companies producing metals like lithium, to manufacturers of battery storage and storage technology providers. By 2022, utility scale battery energy storage capacity is expected to more than double²³, while the market for battery technology is anticipated to reach $US194 billion by 2027 with a compound annual growth rate (CAGR) of 11%²4.

While the concept may sound alien to much of coal-dependent Australia, the truth is that parts of Australia are already leading the way. Wind and solar generation are responsible for 50.5% of South Australia’s energy needs²5, supported by the Tesla-built Hornsdale Power Reserve which has a storage capacity of 150MW/193.5MWh²6.

Growth in electric vehicle use is similarly likely to fuel demand for battery storage in the coming years. BloombergNEF predicts electric vehicle sales to rapidly increase from 1.7 million cars, representing 2.7% of new cars sold in 2020, to 54 million cars, representing over half of all passen-ger vehicles sold by 2040²7.

schools worldwide are recognising the current interest in accessing their campuses, with interna-tional education worth $38 billion to the Australian economy¹7. Luxury consumer discretionary brands from houses like LVMH are already reaping the benefits¹8, while healthcare and vitamin com-panies like Blackmores are discovering consum-ers who are focused on their health needs and have the finances to pay for it¹9.

The shift has also been responsible for the emer-gence of a number of global power players domi-ciled within the Asian region. Armed with local expertise to manage regulations, cultural differ-ences, anticipated demand and needs, these com-panies have massive and growing client bases and the ability to pivot to other regions. Chinese based company Alibaba and Indian multinational Infosys Ltd are good examples.

Investors interested in exposure to this theme could look at investments broadly focused on the region, those focused on individual countries like China or India, or sectors that may benefit from growth in this region. An example of this is ETFS Reliance India Nifty 50 ETF (ASX Code: NDIA).

2020 2040

1.7 million 54 million

Electric carson the road

ASX Code NDIA

Bloomberg Code NDIA AU Equity

Benchmark NSE Nifty50 Index

Management Costs (%pa) 0.85

Expense Recovery (%pa) 0.15

Rebalance Frequency Semi-Annually

Distribution Frequency Annually

W-8 BEN Form Required No

alternatively focus on specific areas like battery technology which support the supply chain. An example of this is ETFS Battery Tech & Lithium ETF (ASX Code: ACDC).

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Typically, investors might consider three different options for thematic investing.

Investors should be aware of different fees, minimum investments, brokerage, tax implica-tions and W-8 BEN forms for some investments.

There are different risks and benefits to using any of these approaches.

The companies associated with themes may not always be accessible to investors, either because of inability to access stock exchanges they may be listed on or the costs involved. It can also be challenging to ‘pick’ the winners, especially if you aren’t an expert in the field surrounding a particu-lar theme. This is where using managed options, either ETFs or actively managed funds can be a better option for some investors.

ETFs tend to be the lowest cost and most acces-sible option for investors given the potential for exposure to many companies and they usually cost less than actively managed options. Inves-tors in ETFs should still be aware of the invest-ment risks, such as market risk or liquidity risk.

Using thematic investments in your portfolio

Investors may wonder how to allocate to thematic investments and even what portion of their portfo-lio should be allocated to such investments.

Thematic investments are versatile and can be used in a range of ways, such as:

An example of how this might work in practice is one investor might choose a thematic investment like ETFS ROBO Global Robotics and Automation ETF (ASX Code: ROBO) as part of their internation-al equities exposure to offer diversification and to complement more traditional equities exposures such as the S&P 500. Alternatively, a different investor may view it as a growth opportunity and use it as a satellite investment. The size of the allocation may vary depending on how the inves-tor chooses to use it, ranging from 5-10% per investment depending on factors such as existing portfolio composition, risk tolerance, needs and goals.

Another illustration of how thematic investing can be incorporated is shown below:

How to allocate to thematic investments

To complement the equities component in the core of a portfolio.

As a tactical tilt in the satellite portion of a portfolio towards trends or for growth.

As a diversification tool to broaden from typical assets in a portfolio core.

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Direct shares in companies associated with a theme.

Actively managed funds.

Exchange traded funds (ETFs).

Domestic EquitiesASX 200 IndexDirect StocksETFS S&P/ASX 300 High Yield Plus ETF (ZYAU)

International EquitiesMSCI World IndexS&P 500 IndexETFS FANG+ ETF (FANG)ETFS EURO STOXX 50 ETF (ESTX)

Investing in DisruptionETFS FANG+ ETF (FANG)ETFS Morningstar Global Technology ETF (TECH)ETFS ROBO Global Robotics and Automation ETF (ROBO)ETFS Battery Tech & Lithium ETF (ACDC)ETFS S&P Biotech ETF (CURE)

Precious MetalsETFS Physical Gold (GOLD)ETFS Physical Silver (ETPMAG)ETFS Physical Precious Metal Basket (ETPMPM)

Core & Satellite

ASX Code ACDC

Bloomberg Code ACDC AU Equity

Benchmark Solactive Battery Value-Chain Index

Management Costs (%pa) 0.69

Expense Recovery (%pa) 0.13

Rebalance Frequency Semi-Annually

Distribution Frequency Annually

W-8 BEN Form Required No

6

Whichever way investors choose to incorporate thematic investing within their portfolios, they should still consider the suitability for themselves and their portfolio, along with the risks involved including risks which may be specific to a particu-lar theme.

Thematic investments offer investors the chance to be an active participant in the major forces driving human progress. They can also be the opportunity for investors to incorporate their passions within their investments, or even to have the potential of holding the ‘next big thing’ in a more manageable format. The increasing availability of tailored thematic investments in the market means they are more accessible than ever for investors to consider their suitability and fit for their needs, goals and portfolios.

For more information on using thematic investments, please speak to ETF Securities.

ETFS Management (Australia) Ltd (AFSL 466778) (“ETFS”), is the responsible entity and issuer of units in the ETFS S&P Biotech ETF (ARSN 628 037 105) (ASX Code: CURE), ETFS ROBO Global Robotics and Automation ETF (ARSN 616 755 803) (ASX Code: ROBO), ETFS Battery Tech and Lithium ETF (ARSN 605 617 490) (ASX Code: ACDC) and the ETFS Reliance India Nifty 50 ETF (ARSN 628 037 856) (ASX Code: NDIA) (“Funds”). The PDS contains all of the details of the offer of units in the Funds. Any investment decision should only be considered after reading the relevant offer document in full. ETFS Reliance India Nifty 50 ETF:ETFS Reliance India Nifty 50 ETF offered by ETFS Management (AUS) Limited or its affiliates is not sponsored, endorsed, sold or promoted by NSE INDICES LTD and its affiliates. NSE INDICES LTD and its affiliates do not make any representation or warranty, express or implied (including warranties of merchantability or fitness for particular purpose or use) to the owners of ETFS Reliance India Nifty 50 ETF or any member of the public regarding the advisability of investing in securities generally or in the ETFS Reliance India Nifty 50 ETF linked to the Nifty50 Index or particularly in the ability of the Nifty50 Index to track general stock market performance in India. Please read the full Disclaimers in relation to the Nifty50 Index in the Product Disclosure Statement.ETFS Battery Tech & Lithium ETF:The financial instrument is not sponsored, promoted, sold or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade mark or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the Issuer, Solactive AG has no obligation to point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the financial instrument. Neither publication of the Index by Solactive AG nor the licensing of the Index or Index trade mark for the purpose of use in connection with the financial instrument constitutes a recommendation by Solactive AG to invest capital in said financial instrument nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in this financial instrument. Solactive AG will not be responsible for the consequences of reliance upon any opinion or statement contained herein or for any omission.ETFS S&P Biotech ETF:Standard & Poor's S&P Indices are trademarks of Standard & Poor's Financial Services LLC. “S&P”, as used in the term S&P 500, is a trademark of Standard & Poor's Financial Services LLC ("S&P") respectively, and has been licensed for use by ETFS. ETFS products are not sponsored, endorsed, sold or promoted by S&P, and S&P does not make any representation regarding the advisability of investing in ETFS products.This document is communicated by ETFS Management (AUS) Limited (Australian Financial Services Licence Number 466778) (“ETFS”). This document may not be reproduced, distributed or published by any recipient for any purpose. Under no circumstances is this document to be used or considered as an offer to sell, or a solicitation of an offer to buy, any securities, investments or other financial instruments and any investments should only be made on the basis of the relevant product disclosure statement which should be considered by any potential investor including any risks identified therein. This document does not take into account your personal needs and financial circumstances. You should seek independent financial, legal, tax and other relevant advice having regard to your particular circumstances. Although we use reasonable efforts to obtain reliable, comprehensive information, we make no representation and give no warranty that it is accurate or complete. Investments in any product issued by ETFS are subject to investment risk, including possible delays in repayment and loss of income and principal invested. Neither ETFS, ETFS Capital Limited nor any other member of the ETFS Capital Group guarantees the performance of any products issued by ETFS or the repayment of capital or any particular rate of return therefrom. The value or return of an investment will fluctuate and investor may lose some or all of their investment. Past performance is not an indication of future performance. Information current as at 28 September 2020

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