Thematic ETFs driving further growth in ETF market

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Since launching in 2001, ETFs have grown in popularity with Australian investors due to the ease of access, the lower cost compared to actively managed funds and their tracking of well known indices, both Australian and global.

The Australian ETF market is now worth $122bn with over 200 different ETFs listed on the ASX.  Lonsec Research expects this to continue to grow into the immediate future.

Lonsec Research has been covering the ETF market since its inception and in the past year has noticed the rise of thematic ETFs, built around consumer demand for themes such as ESG or climate focussed and technology related themes such as blockchain, cloud computing and semiconductors. Lonsec Research Director of Research, Peter Green, explains “ETF Managers have teamed up with Index providers to develop new indices to cater to the Australian market for more niche or thematic ETFS. For example ETF Securities teamed up with Solactive to create the ETFS Semiconductor ETF which provides exposure to the top, global semiconductor companies. Further, this is a strong thematic sector that Active Fund Managers are capitalising on too.”

These new types of ETFs are growing in popularity, especially among younger investors who are used to market disruptors, interested in the thematics and more likely to be comfortable with the digital trading platforms that make ETFS easy to access. Lonsec Research notes there were 22 new ETFs launched on the ASX over the last 12 months, 13 of which were thematic based ETFs.

For those wanting to invest in these newer ETFS, Peter Green advises that you do you research into both the ETF and the underlying index “Some of these thematic ETFS are much more concentrated than broad-based, global market ETFs. For instance, these thematic ETFs could hold 30 stocks and have heavy weighting to the top five. This means your investment is heavily reliant on these five stocks performing.” Concentration risk can also occur with some the of the more niche ETFs as there is a limited number of securities so they will appear in more than one index. If you hold multiple ETFs covering one of these themes, you may be inadvertently overexposed to one company or sector. Peter Green continues “It is really important that you understand the underlying index of any ETF, in terms of its concentration, rules and volatility and how this matches with your own risk tolerance.”

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