Thematic ETFs boom, drawing punters and concern



LONDON: From cat food into cannabis, it is boom time for unique ETFs offering the chance to punt on market themes in fast-growth industries, but their enormous profits are jaw-dropping a few who view them as a different price-inflated advantage that may endanger market stability.While Reddit”gamestonks” have caught recent headlines, retail investors are also credited with large flows into exchange-traded funds – basically a tradable basket of stocks – swelling their own assets by more than $1 trillion last year, according to Refinitiv.And expansion has been particularly notable in ETFs that goal to exploit returns from themes that capitalise on social and economic tendencies, in space travel to pet care, along with marijuana to health tech.Such ETFs, which can be bought and sold like stocks, more than doubled their funds under management last year to $140 billion, Citi analyst Scott Chronert states, describing inflows as having gone”nearly parabolic”.Thematic ETFs in EMEA lately have obtained $4 billion dollars so far this season, according to the bank, a figure Chronert stated would grow”as investors continue to demand more precise positioning”.The dominant ARK Innovation ETF, containing business disruptors Tesla, payments firm Square along with genome editor Crispr Therapeutics, will be up 350% since last March, whereas the Procure Space and ProShares Pet Care ETFs also have seen massive cost gains.The iShares Global Clean Energy ETF has climbed 275% and cannabis-themed ETFs have appreciated a bumper ride on a view the newest U.S. government will decriminalise the drug.eToro stated it had seen a growth of over 400 percent in the opening of ETF positions internationally on its platform last year, part of an overall tendency of”tremendous growth” in retail investment. “It is easier to invest in themes than particular stocks or broader indices and so tech disruptors, gaming, biotech, have become very popular with retail investors,” said Deborah Fuhr, co-founder of consultancy ETFGI.That’s despite high prices — figures show the Ark Innovation ETF prices 0.75percent versus 0.04percent at Blackrock’s core S&P 500 index ETF.Thematic ETFs are still a small portion of the $8 trillion Exchange Traded Products marketplace. So why are some traders warning of equilibrium risks?Some of it’s down to that which short-seller Carson Block, founder of Muddy Waters Capital, calls for the”autopilot” version of passive investing – purchasing more of an inventory as its price rises and its index weight grows.But if outflows hit, the ETF provider must sell stocks to satisfy redemptions, potentially setting off a chain reaction since the share price drops. That passive selling may”quickly overwhelm the market” Block cautioned in an FT column that this week.The risk could be magnified in thematic ETFs which focus on just a small number of names. ARK Invest, which owns the Ark Innovation ETF, for example owns more than 10% of outstanding shares in some businesses, particularly biotech, Saxo Bank analysts note.Ark Invest wasn’t immediately available to comment.Sebastien Lemaire, head of ETF Research at Societe Generale also claims that the rate of inflows could be about. “Some of these ETFs which have seen record inflows are quite concentrated on a relatively limited number of constituents. “Any change, due to ETFs tweaking holdings because of investor outflows or index rebalancing, can hammer the share price of smaller constituents with lower trading volumes.Within the ARK Innovation ETF, daily January trading volumes from streaming system Roku Inc and virtual healthcare provider Teladoc averaged approximately 3 million shares and 500,000 shares respectively, well below the eight million units for its inherent ETF.And holdings also float across funds. Tesla attributes in no less than 27 thematic ETFs, Citi notes, while chipmaker Nvidia ends up in 45. Thematic ETFs continue to hide, with 17 started in Europe last year, while U.S. ETF specialist Global X started worldwide, focusing on businesses from gambling to telemedicine according to fund research firm Morningstar.The concentration of danger may be even more intense in”three times long, three times short” market traded strategies, where earnings — or losses — could be three times the talk performance.UK-based Graniteshares, which offers 3x lengthy, 3x short exposure to 10 U.S. tech stocks along with 10 UK blue chips,” states $40,000 invested in its Tesla 3x long market traded merchandise at its July 2020 launch would now be worth $1 million.Morningstar, while acknowledging recent dazzling yields, said its research demonstrates thematic funds”have historically struggled to survive and outperform global equity benchmarks over longer periods of time”.

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