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Events & Data Roundtable

ETF Stream Presents :

Thematic indices : Translating megatrends into index methodologies

Thematic investing is a constantly evolving space and with data and index construction methods improving all the time , what are the main considerations when constructing a thematic index ? Chair : Tom Eckett , editor at ETF Stream
Thematic ETF launches have slowed over the past 12 months as rising interest rates and high inflation have slackened demand for segments of the market with higher volatility .
However , many ETF issuers are betting thematics will be back in vogue once we pass peak interest rates with investors willing to take more risk in growth stocks .
While artificial intelligence has been the runaway theme of the year , there are several other themes in the pipeline that our roundtable of experts believe could serve investors well in the future .
The challenge for index providers and issuers alike is to develop indices and ETFs that accurately capture emerging megatrends , working with investors and each other to compile rules that stand the test of time in an ever-evolving landscape .
As a result , the roundtable , in partnership with ICE , assessed the current demand for thematic products , how to identify a theme and how to construct a sophisticated index that balances liquidity , purity and sustainable investing considerations .
Thematic outlook
Stewart : We continue to invest in the development of new and innovative thematic strategies as this is a style of investing we are deeply committed to at LGIM . At the same time , we are diversifying our range by bringing the ethos that has powered our success in thematics to other asset classes , especially fixed income and commodities where we are seeking to provide unique and differentiated exposures . From a flows perspective , the market has seen some profit-taking in artificial intelligence ( AI ), but overall we have not seen the scale of redemptions in thematic investing which some people were expecting when investors rushed into themes , as investors are rightly looking at themes as long-term allocations within their portfolios . Denoiseux : From a long-term perspective thematics are booming , we have seen roughly € 30bn of net new assets over the past five years . Some themes such as our global luxury ETF launched earlier this year have seen massive interest , but I would say we are at a crossroads if you want to launch products . Client interest is resilient in thematics , but professional and institutional investors are in wait-and-see mode , while we see continued demand from retail investors . Lennox : Our clients are investing in thematic ETFs because they are looking to gain exposure to megatrends . While some themes are more growth-orientated than others , other thematic allocations are more defensive than you would expect . Healthcare is a prime example particularly when you look through the social lens of an ageing population . The digitalisation within healthcare is a huge area of growth and investment , but it is still moderately defensive versus a cybersecurity or an AI ETF . Gandhi : Approaches to thematic index construction are ever-changing . For example , we are all
“ The metaverse is a good case example , as it was a futuristic concept that companies had yet to achieve . What resulted were indices and products that were not focused and pure play . Instead , those indices focused on broader , mega-cap tech ”
Dwijen Gandhi , ICE seeing the demand for generative AI themes , but one of the challenges with this area is that many of these companies are not yet public so it ’ s difficult to compile an index or portfolio exposed to them . However , semiconductor companies , and specifically the graphic processing unit ( GPU ) makers , underpin the entire industry . We recently created an index that focuses on the leading GPU manufacturer and their value chain .
Selecting a theme
Gandhi : We analyse the durability of the driving forces behind the underlying macro trend . Is there consumer behaviour or patterns driving this theme ? Secondly , is there government , regulation or policymaking behind the theme ? Thirdly , what is the nature of the technology driving the theme itself ? The metaverse is a good case example , as it was a futuristic concept that companies had yet to achieve . What resulted were indices and products that were not focused and pure play . Instead , those indices focused on broader , mega-cap tech which had early-stage , nascent metaverse products or projects . Lennox : You always need client input , but you must be careful because there are a lot of people who will be looking at the latest fads and making it their theme of the year , so there is more due diligence required . However , it is a very innovative area and you need to take some risks . If you have done your basic due diligence on a theme , even if it goes out of favour for two years , you are building an ETF for the long term , you expect clients will come back into the theme . Stewart : Tech has been the way that thematic investing grew and matured , but there are so many other aspects of the market that are completely independent of tech . Especially when it comes to clean energy or resource-based themes , we are seeing a lot of questions about the environment and the resources needed to power the energy transition , so sustainable themes are definitely of interest , how you capture them properly is the question . Denoiseux : It is very consensus-based at Amundi , listening to people and looking at research . When you have a keyword , hydrogen or healthcare for example , what does it entail in terms of allocation ? How many core stocks are there ? We often visualise one or two key companies but does it make sense in the long-term ? The reality is it is an iterative process between multiple parties to reach a consensus that makes sense from a thematic and commercial perspective .
Index construction
Gandhi : The data that goes into thematic indices versus core indices is often a different type of data . Classifications are more granular than those found in traditional sector or industry schemas . It can include specific revenue expo-