Technology and the energy transition led the growth of thematic exchange-traded funds (ETFs) last year, particularly in China, where structural change is stimulating the development of funds, new research has found.
Investor interest in thematic ETFs has grown exponentially in recent years, particularly since the beginning of the pandemic, according to the report by Morningstar.
At the beginning of 2005, globally, there was only one thematic exchange-traded fund available. By 2010, this number had grown to more than 50. Since then, the number of thematic funds has continued to multiply, with a record 589 new thematic funds debuting globally in 2021, which was more than double the previous record of the 271 launched in 2020.
From 2019 to the end of 2021, assets under management (AUM) in these ETFs grew nearly threefold to $806 billion worldwide. This represented 2.7% of all assets invested in equity funds globally, up from 0.8% just 10 years ago.
Among these thematic ETFs — which range from themes like artificial intelligence to food — the most popular were funds tracking technology themes, followed closely by energy transition themes, according to data by Morningstar.
TECH AND ENERGY
ETFs tracking technology themes secured the largest share of flows over 2021, with $105 billion in combined assets — more than half of the global total invested assets into thematic funds by the end of last year.
The second most popular theme among ETF investors was energy transition, which accounted for $98 billion in assets in 2021, according to the report.
“This is clearly a reflection of where the global markets have identified growth potential,” Kenneth Lamont, senior manager, research analyst at Morningstar told AsianInvestor.
“The largest companies in the world are tech companies, and the transition to a low carbon world is one of the largest challenges that we face,” he said.
The popularity of funds tracking the energy transition was boosted with the election of US President Biden, whose campaign promise of investment in renewables promoted vast flows into these funds, explained Lamont.
“The recent geopolitical stress has further highlighted energy security risks and suggests the theme will continue to be popular,” said Lamont.
Commenting on the investor base for the booming ETF growth, Lamont said the strong narratives built into thematic funds have traditionally been more appealing to retail investors and financial intermediaries, as opposed to asset owners.
“Over the past few years, we have seen an increased interest from institutional investors, many of whom have carved out thematic allocations within their portfolios to help capture the large growth potential embedded in thematic investing,” he said.
“Depending on the mandate, shorter term tactical plays favour ETFs which tend to be narrower, while long-term investments favour broader mutual fund investments.”
China experienced a breakout year for thematic ETFs in 2021 and accounted for nearly one-third of the total new launches globally, according to Morningstar.
Assets in China-domiciled thematic funds increased 51% in 2021, making China the largest thematic fund market outside of Europe and the US, with 11% global market share, according to the report.
Although China’s stock market posted double-digit losses, Yoki Wu, manager research analyst at Morningstar China, said that investors are betting big on Beijing’s economic transformation policy commitments.
“The booming popularity of tech and energy transition themes actually reflects the rapid pace of structural change in China,” Wu told AsianInvestor.
“In recent years, the Chinese government has made a commitment to transform to a low-carbon and innovation-based economy, which stimulates the developments of corresponding thematic funds,” Wu said. Back in September 2020, the government already declared its plan to build a greener economy, she noted.
Similar to the global investor base, Chinese equity funds have been dominated by retail investors for a long time, and there is no exception for thematic funds, said Wu.
“Retail investors contribute more to the growth of thematic funds than institutional investors, but we have seen more money coming from institutional investors over the past few years."