On the Impact of Thematic ETFs on Index Investing

Thematic strategies have gained a lot of traction and popularity since the world economy underwent a massive transformation caused by an impactful macro event. Analysts and investment managers emphasize that some industries affected positively by the change in business conditions could generate greater returns (alphas) than the broader market (beta). ETFs and other index products have become the instrument of choice for betting rapidly on the outperformance of these 'winners' over the aggregated market. The euphoric demand for US-based ETFs is seemingly outpacing its supply as the inflow curve has continued to steepen in 2021. The outstanding exponential growth of thematic investing in the aftermath of the pandemic outbreak feeds further investors’ appetite for ETFs. We examine here whether the recent rise of thematic ETF trading is coherent and in line with the rationale behind index investment strategies as originally envisioned. In addition to a thorough secondary research, the investigation relies on a survey directed to retail investors as well as a cross-analysis of a set of thematic ETFs against a traditional ETF. This paper further questions the continuity of the fast-paced growth in US-based equity ETF trading which represents more than half of the global ETF activity. The results gathered here suggest that the development and the rationale of thematic ETF trading is seemingly deteriorating the reliability of index investing altogether. These risks should be transparently presented to savers. We intend to verify at which point investors can confidently rely on these “hot” equity products. As an ETF holder myself, I question ETFs as a viable investment vehicle for my savings as well as for others. The data gathered here should give investors a guide to the ETF product spectrum and accompany them in their future investment ventures