2 ETFs for Thematic Investors

VIDEO: Passive funds can be a great way to tap into specific trends. Morningstar analyst Kenneth Lamont looks at some of the options in the energy transition theme

Holly Black 19 May, 2021 | 9:40AM
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Holly Black: Welcome to Morningstar. I'm Holly Black. With me as Kenneth Lamont. He is an analyst at Morningstar. Hello.

Kenneth Lamont: Hello, Holly.

Black: So, Kenneth, if we've been talking all things thematic investing this week and some investors might not realize that actually quite an easy way to gain access to trends and themes in the market is through passive funds or ETFs. Why is that such an effective way to do this?

Lamont: Well, so, when you are investing in ETFs, you are getting all the benefits of passive investing. So, you are getting a transparency; you are getting intra-day trading if you need it, which you may not, and also relatively low cost. So, with thematic funds you must also pay attention to cost because they are not as cheap as the very cheapest passive options. But they are very pleasing and simple and straightforward way of accessing a theme.

Black: So, I think people might usually think of a tracker fund as buying the MSCI World or the S&P 500. Obviously, it's a bit different when we are talking thematic. So, what are some of the risks?

Lamont: Yes. Well, the first risk I suppose is that when you compare with broad market exposures, these funds tend to be very narrow. So, you are not getting the full diversification benefit you would with a broader fund. And this brings with it a higher expected volatility. The second sort of increased risk is that these funds tend to fish lower down the market cap spectrum than the sort of broader market cap alternatives. So, again, you are looking at a higher expected risk there as well.

Black: So, let's look at a couple of funds in a bit more detail. I know you've been looking at the theme of energy transition. So, what are a couple of the funds in that area?

Lamont: Yes. Well, the first one I'd like to talk about today is the iClima Global Decarbonisation Enablers ETF. And I like this one specifically because I'm sure many people are familiar with the alternative energy ETFs that are available out there on the market. They are very large. They've been very successful. But I like this one because it really targets in on companies that are trying to solve a very specific climate solution, so looking at decarbonizing our world. And from an investment point of view, I like the way that it builds in a tech element which really gives you exposure to a growth profile perhaps you wouldn't get if you were just looking at the broadest alternative energy or energy transition theme.

Black: Okay. And what is another fund you like?

Lamont: Well, so I've been saying for many years now, I think the water is a very interesting theme and the case for investment in water is really compelling if you look closely at it. This is a scarce resource and perhaps in the world it isn't talked about enough and it's something that really has to be dealt with over the coming years. So, if we're really looking at long-term investment opportunities, I still believe that this is a really good space to look at from an investment point of view.

So, with that in mind, I'd like to talk about the L&G Clean Water ETF. And again, much like the iClima Fund, I like this because unlike the larger and more traditional water ETFs, which tend to have a large exposure to utilities, this fund actually really targets in on tech solutions to the global water problem. So, again, it builds on sort of a growth tilt to an exposure which frequently has a value tilt when taken as a broader segment of the market.

Black: So, what kind of stocks might I expect to see in the portfolio for this one?

Lamont: Yeah. So, water tech, so the Xylem Inc (XYL), for example, a water technology company, and really, companies that really focus in and trying to solve the key water problems that we have.

Black: Kenneth, thank you so much for your time. For Morningstar, I'm Holly Black.

Global Thematic Funds Landscape

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Holly Black  is Senior Editor, Morningstar.co.uk