3 thematic ASX ETFs for 2024 and are they just marketing?

Investors commonly use thematic ETFs as a bet on an area of the market they are interested in but can’t easily access in Australian markets. They are designed for investors who are seeking capital growth and have a high tolerance for risk.

Nowadays, there is a thematic ETF for almost anything, including the future of food, Esports and the Metaverse.

We caution that thematic ETFs are not core holdings and can be more marketing than actual returns. As mentioned above, many thematic ETFs launch at the peak of a 'themes' returns, and soon afterwards make a loss. 

Below are 3 of the more popular thematic ETFs with investors.

1.   Global X Battery Tech & Lithium ETF (ASX: ACDC)

• Renewable energy and technology
• 0.69% management fee
• 5-year annual return of 15.0%

The ACDC ETF tracks an index of companies involved throughout the battery value chain including lithium miners, refineries and battery producers.

Investor interest in batteries and the ingredients required to build them has proliferated due to the rise of electric vehicles. Large-scale battery storage will also be essential to the energy transition given the need to store energy for when the wind doesn’t blow or the sun doesn’t shine.

Interestingly, all 32 holdings in the fund are equally weighted and rebalanced every six months. This means the largest company has the same weighting as the smallest business, before movements in the share price. The median company size inside the fund is $12.1 billion.

Geographically the fund’s largest weighting is to Japan (24.3%), followed by the US (12.7%), South Korea (12.4%), Germany (11.7%) and Australia (11.7%).

With easily the best ticker code on the ASX, it’s to see why investors (and music lovers) have been thunderstruck by ACDC.

2.   iShares Global Healthcare ETF (ASX: IXJ)

• Global healthcare shares
• 0.42% management fee
• 10-year annual return of 9.30%

The IXJ ETF tracks an index composed of large global healthcare equities. The index first determines an investable universe of 1,200 large global companies. Then only companies with healthcare activities are included, of which there are 114 currently.

Healthcare is a broad umbrella that incorporates pharmaceutical, biotech, health services and medical device companies. Growth for the sector is expected to be underpinned by ageing populations, higher prevalence of chronic disease and economic development. 

While over 70% of the holdings are listed in the US, many have global operations with profits derived from several regions. The fund also owns several Australian companies including CSL, Cochlear and Sonic Healthcare.

The ETF provides a simple and convenient way to achieve diversified international exposure without the hassle of tax forms. It also has over 20 years track record of returns.

3.   VanEck Semiconductor ETF (ASX: SMH)

• Global semiconductor companies
• 0.35% management fee
• 10-year annual return of 24.36%

NVIDIA, Applied Materials and ASML are companies most investors are unfamiliar with. However, they are essential to everyday life, helping create the small chips called semiconductors that power everything from phones to spacecraft.

Semiconductors are one of the few industries expected to outpace global owing to the insatiable demand for faster computing and artificial intelligence. The total market is expected to double by 2030 to over $1 trillion.

The ETF is reasonably concentrated, with only 25 companies. The lion’s share of holdings are located in the United States followed by Taiwan and Netherlands.

For a thematic ETF, the management fee is reasonable given this kind of exposure is not available on the ASX. Investors should note however SMH has returned 58% in 2023, so a moderation in returns should be expected.

The InvestSMART view

Thematic ETFs are interesting, but research shows that these funds don’t perform well enough to justify the extra fees.

New thematic products are created to capitalise on the latest trend, but can quickly for out of favour when investors move on to the next big thing.

This was evident with cryptocurrency ETFs which were launched at the top of the bubble in 2021, leaving investors today significantly underwater.

Instead, we advocate for passive ETFs which are the bread and butter of all InvestSMART portfolios. Thematic ETFs can offer targeted exposure, but over the long run, diversified and low-cost ETFs are a far more sustainable strategy for building long-term wealth.

For investors who do want thematic exposure, make sure the ETFs do not represent a disproportionate share of the portfolio as these products are not appropriate as a whole portfolio solution.

Look for ETFs that have several years of performance history and long-term tailwinds that provide the potential for positive returns.