Thematic ETFs are an innovation lab but not risk-free

On the 12/03/20 at 7:55AM


Adrien Paredes-Vanheule

Three experts discussed thematic exchange-traded funds on Wednesday during the European ETF & Indexing forum, co-organised by Agefi and TrackInsight.
Lorraine Sereyjol-Garros (BNPP AM), Julien Bordeaux (BNPP Cardif) and François Jubin (WiseAM)

ETFs have been launched in 2020 on increasingly specific themes covering current or future challenges. Some of the most recent ones cover digital healthcare, minorities' empowerment and special purpose acquisition companies (SPACs). But don’t go thinking that a thematic ETF is only sector-, trend-, or factor-based. In fact, it is “transversal”, according to distributors and investors. To Lorraine Sereyjol-Garros, head of ETF sales and index solutions at BNP Paribas Asset Management, a thematic ETF is, above all, the culmination of a research of a strategy binding in-depth theme relevance and significant potential growth in the years to come. Growth in thematic ETFs is already here. ETFs are right now living their moment in the sun, according to Deborah Fuhr, founder and associate director of the ETFGI consultancy. “Thematic ETFs find buyers in all client segments. Although inflows have been driven mainly by retail investors, we are seeing more and more interest from institutional investors,” Sereyjol-Garros said.

Julien Bordeaux, a senior equity fund manager at BNP Paribas Cardif and thematic ETF allocation manager for several years, has seen some democratisation of thematic ETFs, whereas, five or seven years ago, ETFs were niche products. He stressed the diversification that a portfolio of thematic ETFs can provide. “The risk for the future of thematic ETFs is that the “thematic” concept will be mislabelled, making any criterion “thematic.” “We take care that the ETFs we invest in continue to make sense and have meaning”, he said. François Jubin, CEO of WiseAM, reports that the universe of thematic ETFs that serves his firm has “doubled” within one year. This suits him fine for one of his funds, which was launched in 2019 and in which thematic investments account for 50% of the allocation, particularly via ETFs.

Risk of overlapping

Even so, there could be a risk of overlapping in thematic ETFs. This happened to Bordeaux in 2016, when he was invested in several ETFs covering robotics and its sub-sectors (tech, digital, etc). “We noticed after a few months that we had about 40% to 50% overlapping in the portfolio. The theme may have been too narrow or we may not have monitored sufficiently how the theme and investment universe matched up, or the eligibility of certain securities. We then went back to broader themes,” he said. Overlapping is “inevitable” for managers, Jubin said, who sees it in broad-based thematic funds. “In technology, low carbon and ESG, we see GAFAs, which are common to these themes. The more concentrated that these themes’ indices and ETFs are, the more diversified and purer we can be”.

To prevent overlapping, BNPP AM works in tandem with its extra-financial research centre and its quantitative unit. “It’s easier for some thematics than for others”, Sereyjol-Garros says, mentioning the issue of liquidity of underlyings in themes such as the circular economy. “We have identified pure players, but they are too small to serve as an underlying asset for an ETF, especially when the ETF has reached a certain AuM. We add criteria so that thematic ETFs remain liquid and diversified. Overlapping ultimately remains limited between ETFs whose themes are similar. For example, waste treatment is covered by both our blue economy ETFs and our circular economy ones, and there are only three redundant stocks out of 50.”


Through its investments in thematic ETFs, Bordeaux is also innovating within his portfolio, with a “laboratory bucket” in which he feels free to test and directly confront new themes to the market reality. BNPP Cardif also dialogues with index providers and investment management firms once or twice each year to report needs, propose new themes or to take suggestions on new themes. At WiseAM, Jubin says he “keeps an eye on any market creativity.” “Thematic ETFs are a long-term investment trend as end-investors want to know where their money is going.” Even so, he is worried that a few index providers could come to dominate the market. He believes that calling on alternative suppliers could be a solution for enriching thematic ETF management.

Innovation can also mean evolution, as was the case of the first thematic product launched in 2008 by BNPP AM, which started out with low-carbon European equities before moving on to the theme of carbon footprint reduction and alignment with the Paris Agreement goals. BNPP AM’s latest innovation in thematic ETFs results from heavy client demand, i.e., an ETF thematic map of the United Nations’ Sustainable Development Goals, Sereyjol-Garros said. The SDG ETFs are expected to expand rapidly in the coming years.

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