Many of the world’s largest asset management firms have commissioned studies, glossy pamphlets and marketing phrases filled with power words to sell investors like you on mega trends (what an awesome sounding word).
1. Incredible growth in the online world and digitisation
Bet on the wonders of the internet. According to Datareportal, 63% of us humans are plugged into the online world in April 2022. Potential investing opportunities could be things like ecommerce, esports, data storage or cybersecurity. I’m sure there is an ETF for quantum computing somewhere out there too.
When I first started out investing, I filled my portfolio with a bunch of these. I think I bought a battery ETF because I thought its ticker “ACDC” rocked (haha).
I also owned a biotech one because, if we’re being completely honest, I thought mushing together two cool things I didn’t understand (bio + tech) would surely make it even more impressive.
Please tell me I’m not the only one who has done this…on second thoughts, I do hope there’s only me.
I would like to tell you that I am now a ‘woke’ investor, but instead I’ll opt to label myself an eternal student.
2. The epic rise of the Asian middle-class consumer
It is predicted that roughly 66% of the world’s middle-class population will be living in Asia in 2030. I’m pretty sure China, India and maybe Indonesia do most of the heavy lifting. You can just imagine the implications this has for companies in luxury goods, tourism, healthcare, education and housing industries.
And you can never underestimate the power of the Chinese “A-yi” aunty. I mean, check out their next-level poses.
3. Scarce natural resources
Yes, the earth is getting heavy and weary (the weary bit is a story for another bedtime). There are over 7.8 billion of us busy human ants on the planet now. Our growing population and increasing pressures on global climates and ecosystems are straining the limited resources that we have left – like minerals, food and water.
Being the ingenious bunch that we are, we are developing new technologies to solve these problems (see mega trend 1). Elon Musk is working on battery storage and electric vehicles, while the world’s bright innovators are finding ways to grow vertical farms or capture vibrations from people walking on the sidewalks to power homes in Sierra Leone.
Demand is shifting from some types of scarce resources to others as we make efforts to transition to living in sustainable ways or consume different products. For example, think of materials used to make semiconductor chips or palladium, a rare-earth metal used in catalytic converters to minimise carbon emissions released from the exhausts of petrol-fuelled cars.
Exciting = good investment buy?
So, which mega trends have caught your eye?
Maybe you’ve noticed by now that the themes are often at the forefront of human advancement.
Like pretty fireworks or hunky Chads, new technologies are undeniably exciting and sexy. However, they also haven’t fully matured and may not be sustainably profitable (i.e. have solid long-term potential). So be careful that you don’t get too excited as an investor.
Look, it’s not to say you aren’t able to get good returns out of investing in thematic ETFs. Rather, there are situational risks and costs that could cool your excitement.
At first these mega trends sound like a great investing idea. I mean, who can deny the momentous impact technology has had on our lives and the benefits it has brought to society at large?
But these mega trends are no secret. The side effect is thematic ETFs tend to attract a bunch of easily excitable investors, many of whom are after quick and easy profits (basically short-term traders).
And that’s why thematic ETFs tend to attract a lot of speculation.
This also does two things:
- It makes the price of the ETF more volatile (and hear me now) despite you thinking that you have diversified your risk away.
- It makes managing the ETF more costly for the issuers and drives up the management fees that get docked from your returns. All the switching out of investors jumping in and out of the fund means more work for them in regulating the number of units they need to issue to meet the fluctuating demand by the market.
So speculative assets are not great if you want to build your portfolio with longevity in mind, unless you have some kind of advantage over your fellow ‘investors’.
If you’ve been following my blog, you’ll know I’m big on the behavioural aspects of investing – one of the few levers we do have control over.
Warren Buffett and Peter Lynch have written some great stories of past hypes. These are things like railroad stocks, telephone company stocks, automobile stocks, how crazy everyone went over airline stocks, and internet stocks. There are a lot of parallels even if nowadays our investing conversations are centred around ETF’ed bundles of securities.
A lot of these inventions have undoubtedly benefited civilisation as we know it, but with the benefit of hindsight now, it’s really amusing to learn about how the actual stock prices fared.
Confessions of an ex-thematic ETF enthusiast
Investing in thematic ETFs means you are essentially making an economic bet on how certain demographic, technological or cultural shifts will affect demand and supply for goods and services.
Do you feel confident explaining why you think they will be successful from an investing point of view? Try me!
Featured image credits: Ali Pazani