European Thematic UCITS ETFs Report – January 2022

The Global X research team is pleased to release the European Thematic UCITS Report for January 2022. The report recaps Global X’s classification system for disruptive themes and the thematic ETFs that track them. It also provides industry-level analysis of thematic investing ETFs, looking at new launches and closures, assets under management (AUM) movements, and fund flows.

Click here to download the European Thematic UCITS ETFs Monthly Report for January 2022 

European Thematic UCITS ETF Landscape – January 2022 Recap

At the end of January 2022, there were 86 thematic UCITS ETFs totalling US$36.6bn in assets under management (AUM), falling 11.2% on the month. Themes related to People & Demographics and Physical Environment both saw a decrease in AUMs of 11.8%, while Disruptive Technology themes saw a fall in AUMs of 10.8%.

• In January, UCITS Thematic ETFs recorded US$166m of net outflows, after attracting US$446m of net inflows in December
• The Infrastructure development theme (US$157m) and the Fintech theme (US$34m) led the monthly net inflows, as investors might favour cyclical sector exposures like Industrials and Materials amid the rising yields backdrop
• Climate change themes saw the largest net outflows (US$219m), with the majority of net monthly outflows coming out of CleanTech (US$197m) and clean & renewable energy (US$38m), possibly impacted by the failure to pass Biden’s Build Back Better (BBB) plan in the US which contained some US$555bn in clean energy investments
• Big Data themes also saw large net outflows this month (US$103m), with the bulk of net new outflows coming out of cloud/edge computing themes (US$77m), followed by machine/deep learning themes (US$41m). However, cybersecurity themes continued to experience net inflows (US$15m), following the approval of US$1bn of Cyber funds as part of the US$1.2tn infrastructure package to fund state and local cybersecurity efforts

Global X’s Thematic Classification System

Global X’s research team established a thematic classification system that provides a consistent framework for identifying disruptive themes and categorising the thematic ETF space. Often, we have seen conflicting definitions of thematic investing in the media and financial world, which leads to confusion about which ETFs are thematic and what themes they are tracking. With the introduction of this classification system, we hope to provide more clarity around disruptive themes and their related ETFs.

Defining Thematic Investing

Global X defines thematic investing as the process of identifying powerful disruptive macro-level trends and the underlying investments that stand to benefit from the materialisation of those trends.

By nature, thematic investing is a long term, growth-oriented strategy, that is typically unconstrained geographically or by traditional sector/industry classifications, has low correlation to other growth strategies, and invests in relatable concepts.

Notably, thematic investing does not consist of ESG, values-based, or policy-driven strategies, unless they otherwise represent a disruptive structural trend (e.g. climate change). Further, funds that adhere to traditional sector or industry classifications, or that are used primarily to gain exposure to cyclical trends (e.g. currencies, valuations, inflation) are not considered thematic. Finally, alternative asset classes, such as listed infrastructure, MLPs, and ubiquitous commodities are not considered thematic.

Classifying Themes

Global X’s thematic classification system consists of four layers of classifications: 1) Categories; 2) Mega-Themes; 3) Themes; and 4) Sub-Themes, with each layer becoming sequentially narrower in its focus.

‘Categories’ is the broadest layer and represents three fundamental drivers of disruption: exponential advancements in technology (Disruptive Technology), changing consumer habits and demographics (People & Demographics), and the evolving physical landscape (Physical Environment).

One layer down are ‘Mega-Themes,’ which serve as a foundation to multiple transformative forces that are causing substantial changes in a common area. Conceptually, Mega-Themes are a collection of more narrowly targeted Themes. For example, Big Data is a Mega-Theme that consists of Machine/Deep Learning, Cybersecurity, Quantum Computing, and Cloud/Edge Computing.

Further down, we identify ‘Themes’ as the specific areas of transformational disruption that are driving technology forward, changing consumer demands, or impacting the environment. There are currently 40 themes in the classification system.

‘Sub-Themes’ are more niche areas, such as specific applications of themes or upstream forces that are driving themes forward.

Thematic ETFs can target a specific category, mega-theme, theme, or sub-theme. Our categorisation process seeks to find the best fit for a specific ETF, analysing its methodology, holdings, and stated objectives. The thematic classification system is reviewed quarterly to consider new potential categories, mega-themes, themes, or sub-themes. As a new ETF launches or changes its strategy, its classification is evaluated immediately.

Conclusion

In an uncharted era of new technologies disrupting existing paradigms, demographics reshaping the needs of the world’s population, shifting consumer behaviors forcing changes to existing business models, and dramatic changes in our physical environment, we find that there is a growing need for a consistent framework to track these themes and the investment vehicles providing access to them.