ETFs can provide a number of advantages for investors. Tradeability, flexibility, and transparency can be powerful for crafting exposures. In that ETF category, thematic ETFs can offer exposure to areas as varied as farm commodities and crypto. Thematic ETFs often focus on discrete “themes” like, for example, farm products, or robotics. ETFs’ ability to offer discrete, specific exposures in thematic wrappers benefits even more from active investing.
Why consider active investing when looking at thematic options? While many thematic funds lean on specialized, well-crafted indexes, active management has the potential to outperform those passives. To start with, while index operators have their own expertise, index “funds” often have to follow strict rules, which can limit the impact of seasoned managers who understand their particular theme in ways that index operators might not be able to..
What’s more, active funds often screen for fundamentals in a way that passive funds don’t. Where, for example, an index fund might be required to maintain an allocation to U.S. large caps, a fundamentals-driven screen might have an all-cap equities fund lean towards small caps, instead. Assessing fundamentals in a thematic space, specifically, can have an outsized impact when some thematic categories include fewer firms. Making the right call, then, in either under or overweighing a given security, can significantly impact a fund’s overall performance. Thematic ETFs present an opportunity to outperform when added to a core allocation..
Finally, as ever, active investing helps funds be flexible. Again, thematic ETFs’ focus on specific market sectors makes a tighter focus important. Should an area, such as video game investing for example, see a category-specific risk appear, being able to actively invest and respond more quickly could help an active ETF outperform passive thematic ETFs in the same category.
Taken together, active investing can provide a meaningful boost when looking at thematic ETFs. For investors considering changes to the edge of portfolios, thematic ETFs with an active skew could appeal.