Which thematic ETFs have prospered during the Covid crisis?

Themes such as cloud computing and gaming have been winners.

Some of the biggest winners in the Covid-19 market turmoil have been thematic ETFs, with those tracking technological themes profiting most as broad markets have tumbled. These funds select holdings based on their exposure to one or more investment themes. These themes might be structural or macro trends that transcend the traditional business cycle, such as demographic shifts or technological advances.

While the MSCI World index remains down since the beginning of the year, for example, the WisdomTree Cloud Computing ETF (WCLD) is up 41%. With its focus on cloud computing services, this fund has been perfectly placed to benefit from the lockdown economy. As retailers have rushed to set up or enhance their online solutions, funds holding e-commerce platforms such as Shopify have prospered. Another big winner held by the fund is Zoom Video Communications, which has profited from the global spike in remote working.

- The winners of lockdown and the firms fit for a post-Covid world

Gaming surges

Elsewhere, the Van Eck Vectors Video Gaming & eSports ETF (ESPO) is up 29% year to date. Among its top holdings are gaming giants Tencent and Activision Blizzard, which have been buoyed as the demand for home entertainment has surged.

Up 21% since the turn of the year, the L&G Pharma Breakthrough ETF (BIOT) has also gained from the crisis. Its largest holdings include regenerative medicine firm Mesoblast and vaccine maker Emergent BioSolutions, which have both become involved in the scramble for a Covid-19 vaccine.

Not all thematic ETFs have performed so well. Those such as the iShares Agribusiness ETF [ISAG] and the iShares Global Timber & Forestry ETF [WOOD] have both lagged the MSCI World index by more than 10%. As global demand forecasts have been downgraded, those firms operating in the agriculture and forestry sectors have suffered.

Morbidly, another loser is the iShares Ageing Population ETF (AGED), which invests in companies catering for the needs and aspirations of those aged 60-plus; it is down 7% this year.

Not even technology-focused thematics have necessarily prospered. The global shut-in has seen the Xtrackers Future Mobility ETF (XMOV) lag the MSCI World index. The primary culprits here are a string of global automotive players, such as Ford, General Motors, BMW and Renault held by the fund. Automotive stocks have taken a hit as global car demand forecasts have nosedived.

Five best and worst-performing thematic ETFs year-to-date 

Source: Morningstar, as at 29 May 2020

Risk and return drivers

While some thematic ETFs have prospered in the current crisis and others have not, they have all demonstrated different risk and return drivers, both from the wider market and from each other. This potentially allows them to be deployed tactically to take positions on short-term trends.

However, investors have repeatedly shown themselves to be poor market timers, which in turn leads to inferior investment outcomes. The narrow focus of thematic ETFs also means they have higher risk profiles than most broad funds and therefore we think they are best employed as long-term satellite holdings within a broader portfolio.

One hallmark of thematic ETFs is their lack of traditional sector, geographic and size constraints. For example, the L&G Battery Value-Chain ETF (BATT) invests in companies as diverse as automotive giant Nissan, Chinese battery manufacturer Tianneng Power International and Australian lithium miner Pilbara Minerals. This gives the fund a strikingly different sector and geographic footprint from any of the main global equity benchmarks. It also equally weights all holdings, which means over a quarter of the fund is invested in small or micro caps.

Importantly, the market positions resulting from these weights should be well understood before adding one of these funds to your portfolio. It is important also to remember that as themes are constantly evolving, the biases need to be monitored through time accordingly.

Kenneth Lamont is senior analyst, manager research, passive strategies at Morningstar.