European Thematic UCITS ETFs Report – May 2021
The Global X research team is pleased to release the European Thematic UCITS Report for May 2021. 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.
European Thematic UCITS ETF Landscape – May 2021 Recap
At the end of May 2021, there were 61 thematic UCITS ETFs totalling US$35.6bn in assets under management (AUM), declining by 0.8% on the month. Disruptive Technologies and People & Demographics recorded a monthly decrease of AUMs in May, -2% and -5% respectively, while Physical Environment thematic UCITS ETFs saw a 3% increase.
In May, UCITS Thematic ETFs recorded US$112m of net outflows after US$1.2bn of net inflows in April.
- Climate change related themes attracted the largest net inflows in May with US$332m (vs. US$825m in April). Most of the net new inflows went into clean and renewable energy thematic ETFs (US$138m) and resource scarcity thematic ETFs (US$192m). In May, the European Parliament approved a 17.5 billion of euros fund to help coal dependent EU regions shift to be climate neutral. The funds will be directed to renewables, energy efficiency, sustainable transport and digital innovation.
- Digital technologies and Robotics recorded significant net outflows on the month, with US$80m and US$98m respectively, amid the sell-off in the technology stocks over the past few months led by rising interest rates.
- Health related themes also recorded net outflows in May (US$81m), particularly healthcare innovations. Healthcare companies, specifically pharmaceuticals, were negatively impacted by discussions around waiving vaccine intellectual property (IP) led by the Biden Administration at the beginning of May.
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.
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 39 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.
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.
This document is not intended to be, or does not constitute, investment research