4. Thematic ETFs

4. Thematic ETFs

We are already familiar with ETFs from the previous guide, Investing Profits, which are the critical building blocks of our Beta layer. In the case of my portfolio, these ETFs needed to be

  • Massively diversified (1000-3000 global stocks)
  • High dividend yields

To ensure they are stable, safe and self-growing over a long time.

Since ETFs are a 100% hands-off way to invest, it would be great if we could find a way to use them for our Beta Plus layer as well. Thematic ETFs happen to be the perfect instruments for this.

What are thematic ETFs?

A thematic ETF consists of a curated collection of company stocks positioned to benefit from potential shifts in technology, society, environment, and demographics. In other words, they are meant to be used to bet on long-term changing trends.

For example, there are some things that we can reliably predict, such as the eventual arrival of electric vehicles, metaverse, renewable energies, etc. We can reliably predict in the sense that we know they are very likely to happen in the future, we just don't know when. So how do we invest to capitalise on their arrival?

Why the thematic ETFs?

One obvious option is to manually handpick the related company stocks. For example, if you think that the Chinese economy will for significantly in the future and you want to invest in the top Chinese companies. You can buy the individual Chinese stocks or buy a single ETF that aims to do this for you. Doing this yourself has some serious drawbacks.

  • You are just an individual who probably has an investment account to buy/sell shares in a few countries. Opening a new investment account in a foreign country is a big hassle, and sometimes it's downright impossible. The ETF providers are multi-billion dollar companies that have access to all the markets in the world. They also get huge discounts on buying and selling stocks since they are such big dealers in the market.
  • All ETFs determine what stocks are included based on a set of rules. Expert analysts carefully designed these rules that grade each company from multiple dimensions. They also have the manpower to measure and collect accurate data about all the companies.
  • The ETFs are constantly monitored and updated periodically to remove the companies that don't meet the above rules and add newly qualified companies.

All of the above is done by the ETF maintainers at a ridiculously cheap price.

Beta ETFs vs Thematic ETFs

Compared to the massively diversified ETFs used in the Beta, these thematic ETFs:

  • Have way less number of stocks. It's common to see even just 20 stocks in a thematic ETF. Beta ETFs on the other hand should have thousands of stocks managed under each ETF.
  • Prices fluctuations are way more volatile because there are fewer stocks in thematic ETFs.
  • More risky and more returns.
  • Are not 100% passive. You need to conduct your research to decide on the theme, find the right thematic ETF, continuously monitor the progress and finally sell the ETF to realise the profits.

More tips on thematic ETFs

Unlike the ETFs in the Beta layer, you have to make the hard decision to eventually sell your thematic ETFs to either realise the profits or cut your losses short. This could be an emotionally challenging experience. One way of dealing with this is to not all-in on one theme, no matter how sure you are of it. Have your Beta Plus layer diversified across multiple themes, which will help spread your risks and emotional attachments towards any single one of them.

You can find my thematic ETF investment decisions here. These are not meant to be financial advice but merely my research and recommendations. Please take them as such and follow them at your own risk.

← 3. Real Estate        5. Covered Call ETFs →