Are there opportunities for Indian investors to invest in theme-based US ETFs?

While an investor may choose to invest in stocks, investing through ETFs gives them an option to diversify their portfolio cost-efficiently.

Are there opportunities for Indian investors to invest in theme-based US ETFs?
Thematic investing is an investment strategy where investors identify and invest in long-term trends rather than in specific companies or sectors.

By Viram Shah

The US markets provide Indian investors with a great opportunity not only to diversify their portfolios but also to invest in the world’s largest stock market and some of the biggest brands in the world. While an investor may choose to invest in stocks, investing through ETFs gives them an option to diversify their portfolio cost-efficiently. For example, if an investor wants to invest in the Nasdaq-100, she may invest in an ETF that tracks the Nasdaq-100 instead of buying 100 stocks separately.

ETFs also provide an option for thematic investing. Thematic investing is an investment strategy where investors identify and invest in long-term trends rather than in specific companies or sectors. Thematic investment entails an understanding of the impact of long-term social, economic, political, and technological trends and identifying investment opportunities that these may generate. Thematic investment is based on the premise of outperforming the market as a whole by focusing on specific high-growth areas.

How does one identify themes to invest in? Two things: Start with a long-term investment horizon and try to answer the question of how the world will change in the next decade or so. There are no prizes for guessing that technology will play a crucial role. With the world waking up to the perils of climate change, sustainable development could be another theme to focus on. With rising life expectancy and an expanding aging population, healthcare could be another theme one may want to invest in. Under such broad themes you can then look for sub-themes.

For example, in 2021, the EV market share as a percentage of total cars sold was 9% compared to 0.17% 10 years ago. With governments globally incentivizing electric vehicles and most major car manufacturers aiming to make their entire fleet electric in the next decade or so, the growth in electric vehicles is likely to be huge. Thus, electric vehicles are an investment theme that investors may like to bet on.

Identifying a theme and selecting the companies to invest in would be cumbersome for investors. Here is where thematic ETFs come in. Thematic ETFs consist of a basket of stocks that invest in an underlying theme and are positioned to benefit from growth in these underlying themes. They are transparent and easy to own.

The US markets provide investors an opportunity to invest in some interesting themes because the US is home to some of the most innovative companies in the world. Some of these themes may not be available in the Indian markets, and even if they are, they are at a nascent stage.

Let us look at some examples. To invest in the cloud computing theme, you may choose the Global X Cloud Computing ETF (CLOU) which seeks to invest in companies that are positioned to benefit from the increased adoption of cloud computing technology. If you are bullish on AI and Robotics, you may choose to invest in the Robo Global Robotics and Automation ETF (ROBO) or the Global X Robotics and Artificial Intelligence ETF (BOTZ) which invests in robotics and artificial intelligence companies. Or let us say you are interested in medical science and its potential to extend and improve human life through advanced biotechnology solutions which include gene editing, stem cells, and so on. You may then invest in the Ark Genomic Revolution ETF (ARKG). These ETFs may sometimes track underlying index that provides exposure to a certain theme or they may invest in a basket of companies in that space. You may check the details of an ETF to know a sector breakdown of its investments and its top holdings.

It is important to remember that every good theme may not translate into stock market returns. Also, some themes that are hot right now might have run their course, and the future prospects may not be that bright. Investments based on innovation trends can also be risky as there can be short-term volatility as the theme plays out over time.

It is advised that you tailor your investments based on your risk appetite and asset allocation and consult your investment advisor before making any investment decision.

(The author is Co-founder & CEO, Vested Finance)

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

Photos