Crowded trades can be a painful place in a sell-off, and that’s something we’ve seen with many thematic exchange-traded funds (ETFs) in the last year or so. Funds invested in potentially hyped up areas, from cloud computing to e-commerce, have suffered some hefty paper losses over a 12-month period, while demand for thematic portfolios more generally has fallen away somewhat. As some of the froth dissipates and investors grow more cautious, we might have expected to see fewer of the thematic fund launches that had seemed rife until recently.
And yet, no such luck for any investors hoping for a reprieve. The first full week of September saw the funds industry kick back into action with multiple launches, many of which were thematic ETFs. Fidelity, which has long had a competitively priced range of plain vanilla equity index trackers, has now entered the thematic space with five ETFs, mainly focusing on well trodden themes such as clean energy.
Legal & General Investment Management (LGIM), well known in the thematic space, has launched four new funds with an environmental, social and governance (ESG) exclusion approach, while Global X, VanEck and Franklin Templeton have also unveiled new funds.
I’ve spent enough time discussing the drawbacks of thematic ETFs in the past, but it’s still interesting to see more such products proliferating after such a fierce knockback in markets – even if the sudden flurry is partly down to companies waiting until the end of August to announce a launch.
It’s also interesting to see one particular theme now in the limelight. Fidelity has mainly focused on some core thematic areas covered by a number of other funds, while other new entrants take on what might be new niches. Think the VanEck Genomics and Healthcare Innovators UCITS ETF (CURG) or the Global X Disruptive Materials UCITS ETF (DMAG).
But it seems hard to ignore a clamour to set up metaverse ETFs, as Franklin Templeton, LGIM and Fidelity have all now done. These products will compete with the ETC Group Global Metaverse UCITS ETF (METP), which listed in London earlier this year. As can often be the case there is quite a spread when it comes to fees: the ETC Group comes with a 0.65 per cent total expense ratio, the Fidelity fund charges 0.5 per cent, and the LGIM and Franklin Templeton funds charge 0.39 and 0.3 per cent, respectively.
Besides questioning the extent to which the metaverse is a viable investment theme, investors will carefully need to assess just how the funds might differ, from their level of concentration to the extent they have gone off the beaten path. It’s notable, and perhaps unsurprising, that many of the big tech stocks in the US and elsewhere, such as China, tend to feature in these funds, with varying degrees of prominence. As per usual prospective buyers might ask how much overlap there is here with a US equity tracker, and even with other thematics.
If new funds are surfacing as we enter the autumn and markets seem to have calmed slightly, the issue of overlap with a mainstream equity tracker is at least unlikely to present itself in the investment trust space. The Sustainable Farmland Trust and Independent Living Reit, both of which have declared the intention to carry out an initial public offering (IPO), will add to the growing array of alternatives vehicles if they get off the ground.
