Exchange-traded funds (ETFs) have recently experienced a surge in popularity within the financial realm. These investment vehicles provide investors with appropriate and cost-effective means of accessing diverse assets, including stocks, bonds, commodities, and currencies.
Traditional ETFs track market indexes such as the S&P 500 or the Dow Jones Industrial Average, providing broad market exposure to investors. However, a new type of ETF- thematic ETFs- has emerged in Singapore recently. Thematic ETFs are investment funds that focus on specific themes or trends within the market rather than tracking a traditional index. These themes range from technology and clean energy to healthcare and emerging markets. This article will explore the rise of thematic ETFs in Singapore and their potential impact on investors.
What are thematic ETFs?
Thematic ETFs, also known as niche or strategy-based ETFs, are a type of investment fund that focuses on specific themes or trends in the market. They differ from traditional index-tracking ETFs in that they do not aim to replicate the performance of a broad market index but instead aim to capture the potential growth within a particular theme or trend.
One of the main advantages of thematic ETFs is their ability to provide targeted exposure to specific industries or sectors that are expected to grow. For example, a clean energy-themed ETF would focus on companies involved in renewable energy sources such as solar and wind power. Investing in this type of ETF allows investors to gain exposure to these growing industries without investing in individual companies. It not only provides diversification but also reduces risk.
The rise of thematic ETFs in Singapore
In recent years, the demand for niche investments has risen in Singapore. Investors are increasingly looking to allocate their funds towards specific themes or trends that align with their values and beliefs. As a result, thematic ETFs have gained popularity among investors in Singapore. According to data from the Investment Company Institute, assets invested in thematic ETFs grew by 61% globally in 2020, reaching a record high of $359 billion.
The Monetary Authority of Singapore (MAS) has also supported the growth of thematic ETFs in the country. In 2019, MAS introduced a new framework for ETFs, allowing the listing and trading of thematic ETFs on the Singapore Exchange (SGX). This move has made it easier for investors to access these niche investments in Singapore. Additionally, with the rise of digital brokerage platforms, such as Tiger Brokers and Saxo Markets, investing in thematic ETFs has become more accessible and affordable.
The benefits of investing in thematic ETFs
One of the significant benefits of thematic ETFs is their potential for higher returns. As these funds focus on specific themes or trends, they have the potential to outperform traditional index-tracking ETFs that invest in a broader market. For example, during the COVID-19 pandemic, healthcare-focused ETFs have outperformed the market due to increased demand for medical supplies and services.
Thematic ETFs also offer investors a way to align their investments with their values and beliefs. For instance, socially responsible investing has gained traction in recent years, and investors can now choose from a range of ESG-themed (Environmental, Social, and Governance) ETFs to invest in.
Investors can also benefit from the diversification that thematic ETFs provide. Investing in various companies within a particular theme can reduce risk compared to investing in individual stocks.
Choosing an ETF broker in Singapore
Choosing the right broker is crucial when investing in thematic ETFs in Singapore. An ETF broker is a financial institution facilitating investing and selling ETFs for investors. Here are some factors to consider when choosing an ETF broker in Singapore:
Fees and commissions
Different brokers may charge additional fees and commissions for investing in thematic ETFs. It’s essential to compare these costs to find the most cost-effective option.
Range of ETFs
Some brokers may offer a broader range of thematic ETFs than others, giving investors more options.
User-friendly platform
With the rise of digital brokerage platforms, choosing an ETF broker with a user-friendly platform that allows investors to research and invest in thematic ETFs easily is crucial.
Risks associated with thematic ETFs
As with any investment, there are risks associated with investing in thematic ETFs. These funds may be more volatile than traditional index-tracking ETFs due to their focus on specific themes or trends. If the theme or trend falls out of favour, it can lead to significant losses for investors.
Another risk is the lack of diversification within each thematic ETF. While they provide diversification at the theme level, individual companies within a particular theme may still face similar risks, such as regulatory changes or economic downturns.
It is also essential for investors to research the underlying holdings of a thematic ETF before investing. Some funds may have a more concentrated portfolio, with high exposure to a few companies, increasing the risk.
