So, you want to invest into mining companies because you’ve heard that lithium is the “next big thing”. But, with a myriad of options, where do you begin? This article (including a case study) explores how Electronic Traded Funds or ETFs are evolving so that investors can allocate their money into specific investment themes and trends.
What are some of the big ideas, the themes, that are likely to influence the economy, both locally and globally, in coming years? How about Australia’s aging population? As we collectively grow older we should see increasing demand for assisted accommodation, leisure and entertainment services, escorted travel, pharmaceuticals, healthcare and more. Waste is a growing problem. What does this mean for the development of new recycling technologies and recycled products? Which is the next emerging market or technology set to grow at a spectacular rate?
Picking the right trend and investing at the right time can deliver quite a boost to a portfolio’s performance.
Traditionally, thematic investing has involved buying numerous shares in relevant companies or trying to find a typical managed fund that matches to some degree with the selected theme. But as more trends emerge an increasing number of exchange traded funds have appeared that precisely target a range themes.
Exchange Traded Funds (ETFs)
As their name suggests, ETFs are managed investment funds that are traded on a stock exchange. Their units are bought and sold in the same way as shares so, unlike unlisted managed funds, it’s possible to enter or exit a position in a matter of minutes. Most ETFs follow a specific index or track a benchmark. For example, an S&P/ASX 200 index ETF will deliver the performance (less fees) of Australia’s 200 largest companies. With relatively low fees and transaction costs ETFs provide a convenient way to construct balanced and internally diversified share portfolios.
While ETFs have historically tracked the major indices (ASX200, S&P500, FTSE, etc) a growing number of ETFs now cater to more focused investing. Investors can now easily gain access to companies engaged in cloud computing, biotech, artificial intelligence, cybersecurity, climate change mitigation and many more niches.
One investor taken with the thematic approach is James. He has heard that in the not-too-distant future a number of countries plan to phase out the sale of cars powered by fossil fuels. This, he believes, will massively increase demand for battery electric vehicles (EVs) and the components they are made from. James anticipates that this will see not only EV manufacturers, but also lithium miners and the companies that are developing new battery technologies experience massive growth and generate profits to match.
To back his conviction James could buy shares in a range of EV makers, lithium miners and battery companies. However this may create a mountain of paperwork and incur multiple brokerage charges on relatively small holdings.
Or he could make use of one or more of the growing number of exchange traded funds (ETFs) that cater to his interests.
James does some homework and discovers a battery technology and lithium ETF that invests in EV companies, lithium miners and battery technology companies – just what he was looking for.
A word of caution
There are no guarantees that thematic investing will deliver higher returns. The ‘tech wreck’ of 2000 provides one enduring lesson. So, no matter how compelling any thematic story might be the basic rules of investment still apply, starting with ‘don’t put all your eggs in one basket’.
But if you want to add another dimension to your portfolio, keep an eye on the trends that are constantly emerging, decide which ones might be worth investing in, and ask your financial adviser for an objective opinion of your pet themes.