In a world where Batman meets Warren Buffet, Theme Investing is the winner
This year has been the year when themed investing has dominated the headlines, but at this very moment in time it would be hard to exaggerate how the top 10 best performing ETFs listed on the London Stock Exchange so perfectly encodes the hope that many investors envisage in a post-pandemic world.
Rumour has it that the stock markets have been driven in one direction by the irrational exuberance of the Robin Hood crowd, but don’t believe a word of it, that’s only a fraction of the truth. Having recently received some marketing emails from a recent start-up that is applying the techniques of gamification to drive interest in their investment products I was struck by the extent to which this firm clearly believed ‘Generation XYZ’ wouldn’t pay attention unless the message came complete with amusing icons and bright shiny colours. Increasingly it looks like the future of retail investing might be best described as where Batman meets Warren Buffet.
As Benjamin Graham once retorted, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” With the top 10 ETFs delivering year-to-date returns in the range from 40 per cent up to 90 per cent (see below), the votes are in and the future looks decidedly new school. For those critics whose first reaction is to identify this trend as an investment bubble, I say look past that initial reaction and instead view the success of these investment products as the outcome of a carefully prepared voting scheme.
To get an instant overview of where investors’ sentiment has shifted since the onset of the pandemic just look at the top holdings of each of the ETFs in the year-to-date top ten performance table.
As has been the case for most of the last six months, the WisdomTree Cloud Computing UCITS ETF has topped the league table as the world has gone all in on working from home and by good fortune this ETF’s benchmark index has Zoom as its biggest holding. For a brief moment recently, the iShares Global Clean Energy UCITS ETF took the top spot and with a performance trajectory that has only gone in one direction since lockdown started. Unlike most of the other ETFs in the table, launched in the summer of 2007, this ESG theme has been around for quite some time. To a large extent the interest in this Clean Energy fund had all but vanished but with China’s recent announcement to become carbon neutral by 2060, this is now on message and has seen very strong inflows over the last 6 months in excess of USD800 million.
Very few of us knew what eSports was until a few months ago, but the continued success of the Market Vectors ETF has put paid to that. What is interesting, though, is which stocks have been driving those impressive returns. At the time of writing, the top three holdings comprise Tencent, Nvidia and the chip maker Advanced Micro Devices. Many commentators often talk about the digitalisation of wealth management, but to really see what the possibilities are one must first study the microchip industry. The level of innovation that has been prevalent in this sector of the tech industry makes the financial services sector seem almost medieval.
Source: Algo-Chain and IHS Markit- 13 October, 2020
Looking across all entries in the league table, these themed ETFs provide an excellent representation of the next generation of consumer products and business ideas. For those of you who may have heard the narrative behind the HANetf Emerging Markets Internet & Ecommerce UCITS ETF, the case for this investment theme is hard to ignore. For example, take a number of the sluggish state-controlled businesses out of the mainstream China index and you’ll get left with the most promising businesses. As always, there is a slight catch, in this fund the top three holdings comprise Meituan, Alibaba and Tencent, names that one will find with increasing frequency in the themed investment space. This does suggest if you plan to invest in a range of themed funds you should spend more time researching the concentration risk of the individual names across your whole portfolio.
Working through the rest of the table it is quite enlightening to see both Blockchain and Artificial Intelligence as themes on offer. Both industries will almost certainly dominate the next 25 years. Taking the top 3 holdings in each fund doesn’t entirely shed light on the rationale for inclusion within the respective benchmark indices; Taiwan Semiconductor, Monex and Kakao in the case of Blockchain and Tesla, Salesforce & Square in the case of Artificial Intelligence. However, that is the benefit of investing in a tracker, basically the investor is letting the ETF & index provider do the heavy lifting for them.
An increasing number of market commentators, or should I say ‘Sages’, are suggesting that themed investing products are now looking expensive, you don’t say! My guess is that almost certainly Warren Buffett will refrain from adding to the bubble, but in a world where there seems no limit to how many Marvel movie sequels can get released, anything is possible. To this add the power of digital marketing which as a science can easily influence retail investors, and probably a fair percentage of professionals as well. I do worry though about the new ‘Boiler Room’ tendency that is now prevalent in the retail space, a trend that will only get worse.