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Rask
Rask
Mar 27, 2025

5 Thematic ETFs for 2025: Position Your Portfolio for Growth

Rask - 5 Thematic ETFs for 2025: Position Your Portfolio for Growth

The discussion centers on thematic investing, which involves structuring investment opportunities based on long-term structural changes in the economy, technology, and demographics. Thematic investing is contrasted with sector investing and fads, emphasizing the importance of identifying themes with long-term structural tailwinds, such as the digital revolution and AI advancements. The conversation highlights the difference between sustainable themes and short-lived fads, using GameStop as an example of the latter. The podcast also explores specific ETFs, including those focused on cyber security, gold, and India. Cyber security is identified as a resilient sector with significant investment due to increasing cyber threats and technological advancements. The gold ETF, which is currency hedged, is noted for its strong performance driven by central bank buying and geopolitical uncertainties. The India-focused ETF is highlighted for its potential due to India's economic growth and demographic advantages. The discussion emphasizes the importance of understanding the underlying companies and trends when investing in thematic ETFs.

Key Points:

  • Thematic investing focuses on long-term structural changes, unlike sector investing or fads.
  • Cyber security is a strong thematic investment due to increasing threats and technological advancements.
  • Gold ETFs, especially currency hedged ones, are performing well due to central bank buying and geopolitical uncertainties.
  • India's economic growth and young population make it a promising thematic investment.
  • Understanding the underlying companies and trends is crucial when investing in thematic ETFs.

Details:

1. 🎙️ Welcome to the Australian Finance Podcast

  • BetaShares is a prominent ETF provider in Australia, managing assets worth tens of billions of dollars and serving over 1 million investors, including financial advisors.
  • The Australian Finance Podcast collaborates with BetaShares to promote a long-term, sustainable investment philosophy, focusing on strategic financial growth.
  • The episode highlights the importance of understanding ETFs, which are investment funds traded on stock exchanges, and thematic investing for wealth creation over the next 5 to 10 years.
  • Listeners will gain insights into both short-term and structural long-term ETF investments, essential for future portfolio positioning, with practical examples and strategies discussed.

2. 🔍 Exploring Thematic vs. Sector Investing

  • Thematic investing targets opportunities from long-term structural changes, like the digital revolution and AI advancement, focusing on sustainable revenue and profit growth.
  • Sector investing categorizes the economy into sectors such as financials or industrials, used mainly for categorization rather than strategic growth targeting.
  • Thematic investing splits into investments backed by structural growth versus those driven by transient hype, with the former offering more sustainable opportunities.
  • The GameStop incident (early 2021) serves as a cautionary example of hype-driven investment, lacking in fundamental earnings growth, highlighting the risk of trend-following without structural backing.
  • Investors should scrutinize thematic ETFs to distinguish between those driven by genuine growth factors and those propelled by market excitement, ensuring informed decision-making.

3. 🚀 Differentiating Fads from Long-term Trends

  • Cyber security is identified as a strong thematic with consistent year-over-year performance and sustained investment flows, indicating it is a long-term trend rather than a fad.
  • Thematic investments such as marijuana ETFs or certain climate energy funds have shown weaker performance and investment flows, suggesting they may be fads rather than sustainable trends.
  • Investors should examine the top holdings of ETFs to differentiate between fads and long-term trends. Familiarity with established companies in the portfolio can indicate a more stable investment.
  • ETFs offer transparency, allowing investors to see the underlying holdings and assess the reliability and performance of the companies included.
  • Investing in leading companies within emerging fields like AI can mitigate the risk of job displacement by becoming an owner in the economy rather than just a consumer.

4. 🧠 Understanding Smart Beta ETFs

4.1. Smart Beta ETFs Overview

4.2. AQL: A Case Study

5. 🏆 Prioritizing Quality in Australian Stocks

5.1. Financial Sector Insights

5.2. Mining Sector Insights

5.3. Quality Investment Strategy

6. 💸 Enhanced Cash ETFs Amidst Interest Rate Changes

  • The current average one-year term deposit rate across Australia's big four banks is 4.1%, a decrease of 35 basis points since July of the previous year.
  • The dividend yield on the ASX200 has decreased from 5% to around 3.6%, prompting investors to seek alternative income sources.
  • Enhanced cash ETFs, like the MMKT, invest in money market securities with maturities of less than a year, such as negotiable certificates of deposits, commercial paper, and floating rate notes.
  • Launched in November 2023, the MMKT ETF returned 4.85% as of January 31, offering competitive returns compared to traditional term deposits or Australian shares.
  • These ETFs provide investors with the optionality to achieve higher returns and reallocate to other market opportunities when advantageous.
  • Enhanced cash ETFs offer access to corporate-level securities, providing higher returns with slightly increased risk, without needing to be an institutional investor.

7. 🔒 Investing in Cybersecurity: A Growing Need

  • The advancements of AI technologies and geopolitical conflicts are increasing the rate of cybersecurity attacks, prompting businesses to invest in high-quality software solutions.
  • Companies like CrowdStrike and Palo Alto are leading providers in cybersecurity, with businesses consolidating their software packages to manage costs effectively.
  • The cybersecurity industry is evolving with products like SOAR (Security Orchestration Automation and Response), which helps analysts focus on higher-level security alerts.
  • IAM (Identity Access Management) software is crucial in combating deep fake threats by determining the authenticity of images.
  • Morgan Stanley research forecasts $260 billion spending in cybersecurity by 2025, highlighting its resilience in enterprise budgets.
  • Cybersecurity remains a critical element in business operations, often prioritized over other areas like marketing when budget cuts occur.
  • CrowdStrike reported a 61% increase in annual recurring revenue, demonstrating the demand for effective cybersecurity solutions.
  • Palo Alto Networks has integrated AI to enhance its threat detection capabilities, setting a standard for the industry.

8. 🌟 Gold as a Strong Investment Choice

  • QA ETF is the only currency hedged gold ETF, hedging all assets back into Australian dollars.
  • Gold prices are nearing $3,000 per ounce, showcasing strong performance.
  • Central banks bought 1,000 tons of gold annually from 2022 to 2024, doubling the previous decade's average.
  • The freezing of Russian assets in 2022 increased gold purchases by emerging markets like Poland, Turkey, India, and China.
  • Geopolitical conflicts, such as the Hamas-Israel conflict, heighten gold's appeal as a market hedge.
  • Gold's use in technology, for building circuits, can boost demand and price.
  • Gold ETFs experience increased flows, supporting gold prices.
  • Interest rate declines and a weaker US dollar are factors that could support gold prices.
  • In a balanced portfolio, gold usually constitutes about 5% of alternatives.
  • For high growth portfolios, the alternative sleeve can be 10-15%, allowing more allocation to gold.
  • Gold acts as a hedge against economic uncertainty and equity market stress.
  • The currency hedged ETF mitigates US and Australian dollar exchange rate fluctuations, benefiting from the currently low Australian dollar.

9. 🌏 India's Economic Emergence and Investment Potential

  • India's economic growth rate is above 6%, a level not found elsewhere globally, indicating a robust growth environment.
  • India's young population mirrors China's demographic a few decades ago, suggesting potential for sustained economic expansion.
  • Despite concerns over economic slowdown due to high inflation and recent elections, India's long-term growth prospects remain positive, supported by government infrastructure investments.
  • India's exports to the US are predominantly service-based, offering a level of protection against tariffs affecting goods-focused economies like China and Mexico.
  • Foreign direct investment in India is being actively encouraged, contributing to its economic growth.
  • The Indian Quality ETF focuses on high-quality companies within India, such as HDFC Bank, ICICI Bank, Infosys, and TCS, targeting sectors like IT services and banking.
  • Infrastructure development is a priority in India, with significant investments in national highways and airports.
  • Investment strategies emphasize a diversified portfolio to capitalize on India's growth while managing risks.
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