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5 Ways To Invest in Innovation Through ETFs

When it comes to investing, exchange-traded funds (ETFs) are a popular way to gain exposure to a diversified portfolio of securities, including stocks, bonds, and commodities, with the convenience of buying and selling them on an exchange like individual stocks. ETFs are designed to track the performance of an underlying index or asset class and can offer investors low fees, tax efficiency, and flexibility in investment strategies. (Find out more about ETFs and other financial terms through our Finance Glossary.)

ETFs allow investors to invest in innovative technology like cybersecurity, clean energy, and cloud computing to blockchain. These thematic ETFs are a great way for you to ride the wave of the hottest trends carrying the entire sector, instead of trying to pick a  winner in the industry.

Ahead, we discuss the pros and cons of thematic investing, as well as 5 thematic ETFs in the market’s trending industries.

What Exactly Is A Thematic ETF?

A thematic ETF is an investment fund that focuses on a specific theme, such as climate change or artificial intelligence, by holding a portfolio of companies that are expected to benefit from that trend. The ETF provides investors with an opportunity to gain exposure to a targeted segment of the market, allowing you to align your investment strategies with your personal values or interests.

Read more: The Rise of Bitcoin ETFs: A New Era for Cryptocurrency Investing

Pros & Cons Of Thematic Investing

Thematic investing refers to the strategy of investing in companies or assets that are expected to benefit from specific long-term trends or themes. Thematic investing comes with its own set of pros and cons:

Pros:

  • Potential for higher returns: If the theme or trend turns out to be successful, thematic investing can offer higher returns than a diversified portfolio.
  • Alignment with personal values: Thematic investing can align with personal values or interests, allowing you to support causes you believe in, such as sustainability or social responsibility.
  • Access to niche markets: Thematic investing can provide access to niche markets or industries that are not easily accessible through traditional investments.

Cons:

  • Higher risk: Thematic investing is often concentrated in a particular sector or theme, which can lead to higher risk and volatility than a diversified portfolio.
  • Limited diversification: By focusing on a particular theme, you may miss out on opportunities in other areas of the market, limiting diversification.
  • Limited track record: Thematic investing strategies may lack a track record or historical performance data, making it difficult to assess their long-term viability and potential returns.

Read more: What to Look Out for When Investing in ETFs?

How Do I Invest In Thematic ETFs?

Thematic investments allow you to leverage your personal values or beliefs about the future to drive your investment decisions. Unlike traditional investments that are limited to stocks, thematic investments enable you to invest in a broader range of assets, including bonds, commodities, real estate, and more. With thematic investing, you have the flexibility to handpick a portfolio of assets that best align with your investment strategy and incorporate them into your preferred theme.

Some trending examples include:

1. ESG

ESG, otherwise known as “Environmental, Social, and Governance,” is a type of sustainable, or socially responsible investing that is gaining popularity among investors. Investment firms are taking notice and offering financial products that follow ESG criteria, while companies are striving to improve their ESG scores to appeal to a broader range of investors.

Various analytical institutes assign ESG scores based on different sets of criteria and methodologies. As a result, the same investment can receive different ratings depending on the approach taken by each institute.

ESG investing aims to align an investor’s portfolio with their ethical values. However, evidence shows that ESG investments can perform similarly to traditional investments, with less risk to the investor.

Top 5 holdings:

  • iShares ESG Aware MSCI USA ETF
  • SPDR S&P 500 ESG ETF
  • Fidelity U.S. Sustainability Index Fund
  • Nuveen ESG Mid-Cap Growth ETF
  • Calvert International Responsible Index Fund

2. Metaverse

The Metaverse represents a groundbreaking new concept in technology and user experience that has the potential to revolutionise the way we interact with digital environments. It is an immersive virtual world where users can engage with each other, their surroundings, and lifelike digital beings powered by artificial intelligence through highly realistic interactions.

The impact of the Metaverse on society and technology could be as significant as the emergence of the internet in the 1980s and 1990s. In fact, Meta CEO Mark Zuckerberg referred to it as an “embodied internet” in his October 2021 letter, highlighting its potential to transform the way we live and work.

The underlying holdings of a Metaverse ETF can include companies involved in the development of virtual reality headsets, haptic feedback technologies, spatial computing, and digital currencies that can be used within the metaverse. Investing in a Metaverse ETF can be a way for you to gain exposure to this emerging trend and potentially benefit from the growth potential of the metaverse.

Top 5 holdings:

  • Roundhill Ball Metaverse ETF
  • Fidelity Metaverse ETF
  • Betashares Metaverse ETF
  • Fount Metaverse ETF
  • Subversive Metaverse ETF

3. Gold

Investing in physical gold can come with the inconvenience of storage and high fees associated with buying and selling it. In this case, a gold ETF might be a preferable option for investors looking to invest in gold.

Gold is a popular investment choice among investors seeking a hedge against stock market volatility. Instead of purchasing physical gold, investors may choose to invest in gold exchange-traded funds as gold prices rise.

Gold ETFs are investment funds that hold gold assets like bullion or futures contracts and are traded on stock exchanges. These ETFs are priced directly in line with gold prices, allowing investors to buy and sell shares on stock exchanges similar to other stocks.

Top 5 holdings:

  • SPDR Gold Shares
  • VanEck Vectors Gold Miners ETF
  • VanEck Vectors Junior Gold Miners
  • iShares Gold Strategy ETF
  • Goldman Sachs Physical Gold ETF

4. Biotech

Looking to invest in a rapidly growing and exciting industry? Biotech may be just the opportunity you’re looking for. With hundreds of biotech companies working tirelessly to develop innovative therapies, investing in this sector can offer the potential for significant growth and the possibility of game-changing breakthroughs in the prevention and treatment of diseases.

However, investing in individual biotech stocks can be complex and risky, given the challenges of the product development process. Luckily, there is an alternative – biotech ETFs, which allow you to diversify your investment across dozens or even hundreds of companies focused on developing cutting-edge treatments, therapies, and vaccines in the biotech and healthcare industries.

Top 5 holdings:

  • SPDR S&P Biotech ETF
  • Ark Genomic Revolution ETF
  • VanEck Biotech ETF
  • Virtus LifeSci Biotech Products ETF
  • First Trust NYSE Arca Biotechnology Index Fund

5. AI

Artificial Intelligence (AI) is likely a more ubiquitous part of your daily life than you realise. From the algorithm that curates your Netflix menu to the software that speeds up your Amazon package delivery, and the underlying technology of many of the smartphone apps you use regularly, AI is everywhere.

An AI ETF invests in companies involved in the development and deployment of artificial intelligence technologies. The ETF provides you with exposure to a diversified portfolio of companies engaged in the research, development, and application of AI across a range of industries such as healthcare, finance, and retail. The underlying holdings of an AI ETF can include companies involved in machine learning, natural language processing, robotics, and data analysis, among others. Investing in an AI ETF can be a way for you to capitalise on the growth potential of this rapidly expanding field without having to pick individual stocks.

Top 5 holdings:

  • iShares Exponential Technologies ETF
  • Defiance Machine Learning & Quantum Computing ETF
  • ROBO Global Robotics & Automation Index ETF
  • AmazonCom Inc ETF
  • Alphabet Inc. Class A Common Stock ETF

Discovering Investment Opportunities In Trends

Thematic investment strategies enable investors to leverage personal preferences and capitalise on emerging trends. By exploring investments outside traditional options, investors can potentially benefit from increased diversification and profit opportunities.

However, it’s crucial to keep in mind that many thematic trends are designed for long-term investment horizons. Furthermore, thematic investing carries its own set of risks that should be evaluated in the context of an investor’s overall portfolio.

Read more: Should I Invest in Real Estate or ETFs?

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