Thematics Unlocked: Signs of a maturing ETF market - Page 23

thematic ETF launches in Europe since the beginning of the pandemic
Changes to index rules helped reduce the portion of constituents held by the S & P Global Clean Energy ETFs
Chapter 5 : Thematic ETF liquidity together owned more than 10 % of Contact Energy – falling to around 2 % after S & P changed its index methodology last March .
Before the index provider increased its constituent count to 82 stocks , ETFs tracking the benchmark split their $ 14bn assets under management ( AUM ) between just 30 companies . This is significant as liquidity issues can happen with far less money , Lemaire said .
“ I have seen some strategies which could cause liquidity problems for the underlying market with only three of five billion dollars invested in them ,” he continued . “ It all depends on the number of constituents and their size .”
These liquidity issues and rebalance events also come at a cost to end investors as opportunistic participants increasingly look to thematic reweightings and the forecastable


offloading and buying of stock .
“ Traditionally , they were working on predictions and deletions on vanilla indices . But increasingly , the growing part of this industry is focusing on nonvanilla indices that have become very big through ETFs ,” Lemaire warned .
On the one hand , hedge funds seeking arbitrage opportunities push up the price of constituents as positions within an index are being opened or enlarged . On the other hand , such activities mean these participants are increasingly becoming key
thematic ETF launches in Europe since the beginning of the pandemic
liquidity providers during thematic index rebalances , Lemaire argued .
The last couple of years of thematic growth has been a steep learning curve for investors and index providers alike . It is crucial that in their rush to bring new products to market , ETF issuers consider the trade-off between liquidity , theme purity , diversification and asset gathering as part of their fiduciary duty .
Jamie Gordon is a reporter at ETF Stream