These niche funds have the potential to outperform more generalized investments.
The power of index funds is well established, as patient investors who “set it and forget it” tend to be very happy with their portfolios in the long term. But many investors either want to chase performance over reliability or simply cannot wait 10 or 20 years for their portfolios to pay off. That’s where thematic exchange-traded funds can come in. These funds invest in a basket of stocks that share a common strategic opportunity but often come in different sizes or geographic flavors. The important thing is the theme — and if that theme pays off, the ETF will do quite well. Here are seven thematic ETFs that are in fashion right now.
Global X Autonomous & Electric Vehicles (ticker: DRIV)
With about $1 billion under management, this Global X fund is a serious contender with substantial assets under its belt. The reason for this fund’s popularity should be obvious. Analyst firm Wood Mackenzie predicts sales of more than 6 million EVs in 2021, and in the first half of this year, sales doubled over the same period last year. Safety features such as lane assist and smart cruise control keep getting more sophisticated, with some like Tesla Inc. (TSLA) CEO Elon Musk insisting that fully autonomous driving capability is right around the corner. DRIV makes sure you have a foot in all these emerging transportation technologies via hot stocks like Tesla, as well as more than 70 others, including legacy automakers like Toyota Motor Corp. (TM) and tech stocks like Google parent company Alphabet Inc. (GOOGL, GOOG).
ARK Innovation ETF (ARKK)
Cathie Wood of boutique management firm Ark Invest has quickly made a name for herself thanks to this dynamic ETF that plays on the broad but compelling theme of innovation. According to official fund documentation, “ARK defines ‘disruptive innovation’ as the introduction of a technologically enabled product or service that potentially changes the way the world works.” That means you get a share in stocks such as remote medicine firm Teladoc Health Inc. (TDOC) and cryptocurrency platform Coinbase Global Inc. (COIN), to name a few. This fund is incredibly popular, with more than $20 billion under management and a five-star rating from research firm Morningstar.
Direxion Work From Home ETF (WFH)
Though it’s the smallest thematic ETF on this list at just $112 million in assets, WFH gained fast attention following its June 2020 launch in the wake of workplace disruptions caused by the pandemic. Nearly everyone, save some stubborn and out-of-touch bosses, agrees that some kind of remote work, whether it be hybrid or full-time telecommuting, is here to stay. This ETF plays the work-from-home trend, with top holdings including high-tech telecom firm 8×8 Inc. (EGHT), creative software giant Adobe Inc. (ADBE) and Amazon.com Inc. (AMZN).
Global X Cloud Computing ETF (CLOU)
Similar to the work-from-home trend that takes a nod from major enterprise technology themes, the Global X Cloud Computing ETF is a powerful way to filter out sleepy legacy tech stocks from their more dynamic peers. Consider that in 2020, revenue from the worldwide public cloud services market totaled $312 billion, according market research firm IDC estimates. That cloud spending is expected to grow more than 15% per year over the next five years. With cloud infrastructure plays like security firm Zscaler Inc. (ZS) and dynamic cloud software leaders like Salesforce.com Inc. (CRM), this is a one-stop shop to ensure that you tap into this business megatrend in the years to come.
Global X FinTech ETF (FINX)
In the digital age, the idea of mobile payments has moved decidedly into the mainstream. Beyond just smartphone apps that allow you to buy falafel at a food truck with ease, there are also many next-generation technologies being deployed in the financial sector, including artificial intelligence programs that detect fraud and cryptocurrency applications. Global X and its $1.3 billion FINX ETF wraps this theme up in one fund, with top holdings including mobile payments giant Square Inc. (SQ) and accounting technologies company Intuit Inc. (INTU). If you want to play the rise of fintech, this thematic ETF could be worth a look.
Robo Global Robotics & Automation ETF (ROBO)
While other technological trends tend to make more headlines due to flashy, consumer-focused angles, investors should not overlook the ROBO thematic ETF, which holds $1.8 billion in assets. As the name implies, this fund comprises stocks that are working toward automation and efficiency in industrial, health care and technology settings. Top holdings include semiconductor industry service provider Brooks Automation Inc. (BRKS), digital health care company iRhythm Technologies Inc. (IRTC) and 3D printer manufacturer Stratasys Ltd. (SSYS), to name a few.
Ark Space Exploration & Innovation ETF (ARKX)
As the old TV cliché goes, space is the final frontier of human discovery — and with ARKX, investors can tap into the publicly traded companies that are involved in the 21st-century space race. This $534 million fund is a good mix of traditional aerospace names like Lockheed Martin Corp. (LMT), satellite firms like Trimble Inc. (TRMB) and next-generation plays like drone leader AeroVironment Inc. (AVAV). If you really want to chase moonshot stocks, then this thematic ETF offers you true exposure to for-profit space companies.
Thematic ETFs to buy for the fourth quarter:
— Global X Autonomous & Electric Vehicles (DRIV)
— Ark Innovation ETF (ARKK)
— Direxion Work From Home ETF (WFH)
— Global X Cloud Computing ETF (CLOU)
— Global X FinTech ETF (FINX)
— Robo Global Robotics & Automation ETF (ROBO)
— Ark Space Exploration & Innovation ETF (ARKX)
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Update 10/14/21: This story was published at an earlier date and has been updated with new information.