Do thematic ETFs have the Heineken factor?

Sure, they also provide low-cost exposure to all the world’s major equity markets, plus almost all the bond and commodity markets. Arguably, however, their great merit is this ability to fill gaps in a portfolio that, otherwise, retail investors would struggle to fix. As such, it’s barely an exaggeration to say every diversified retail portfolio should hold some ETFs.

The table shows six ETFs that might be candidates; five deal with major societal themes to which it is tough to get exposure. True, it does not follow that money is to be made from an investment theme just because it is important. Yet in the case of the longest-running fund in the table – iShares Global Water (IH2O) – returns have been fine. Since its inception in 2007, its value has grown at 8.5 per cent a year, usefully better than the MSCI World index of large companies. The fund is part of a series of ‘mega trends’ ETFs launched by iShares, though we might question how far it addresses the major question about water – the quantity and distribution of the stuff in the poor world. After all, it tracks an index dominated by developed-world utility providers.

No such reservations about iShares Ageing Population (AGES). This tackles a problem almost exclusive to the developed world; not that – among the Zimmer frames and hypertension pills – it has offered much opportunity to make money. In its four-and-a-bit years, the ETF hasn’t matched the MSCI World index. The implication is that the drain on the public purse of meeting the huge unfunded costs of ageing leaves little room for private profit.

Pot-loads of money, however, have been made by the other health-related fund, Hanetf Medical Cannabis and Wellness (CBDP), whose share price has almost doubled since its launch in January 2020. The intended pun highlights the investment returns now being made from the ability of cannabinoids to treat a range of disorders, best known of which is epilepsy. The impending takeover of GW Pharmaceuticals (US:GWPH) by Jazz Pharmaceuticals (US:JAZZ) has ignited the fund’s performance. Whether its takeover marks a high point for this micro-sector or whether it is the cue for more deals is guesswork. That said, it is easy to see the attraction of having exposure to this niche.

Arguably more important is to use ETFs as the vehicle for exposure to perhaps the most important investment theme in decades – profiting from the developed world’s obsession with anthropogenic climate change. Given the billions that will be wasted on this quixotic venture, it is disappointing how tough it is for investors to achieve this (see Bearbull, 15 January 2021).

The two relevant ETFs in the table go about this task slightly elliptically. iClima Global Decarbonisation Enablers (CLMP) – also from Hanetf – invests in companies that supply the tools by which CO2 emissions are reduced, which is why it has a stake in Tesla (US:TSLA), for example. More focused is the approach of Wisdom Tree Battery Solutions (CHRG), which aims to capture all points in the value chain used to make energy storage, from the companies that mine lithium to those that supply hydrogen fuel cells. One day – hopefully soon – UK retail investors will get an ETF that directly tracks carbon prices. Until then, these may have to do.

Last, not least, though decidedly old world, Wisdom Tree Global Quality Dividend Growth (GGRP) is relevant for those focused on equity investing for income. The type of company whose stock should be in the fund is implied by the name – dividend champions, both those long established such as Nestlé (SIX:NESN), for example, and those in the making, such as Microsoft (US:MSFT). The fund also includes former champions, such as GlaxoSmithKline (GSK). More instructive for those wanting to know how much income to extract from their portfolio, the fund’s yield is just 2.4 per cent and even a level as low as that hasn’t prevented the fund underperforming the MSCI World index.

Email: Bearbull@ft.com