Which thematic ETFs should investors be looking at?

Thomas Gilman
Senior wealth advisor, senior portfolio manager, Harbourfront Wealth Management, Vancouver

Artificial intelligence (AI) and cybersecurity have excellent growth opportunities in the medium to long term. The rapid development of AI has tentacles in almost every sector, and a wide range of ETFs are seeking to capitalize on this trend. Meanwhile, there are several cybersecurity ETFs available that are looking to cash in on an industry that is growing alongside the increasing volume of cybercrimes.

AI is a nascent technology, and therefore investing in it comes with high risk. But traditional passive ETFs in some investors’ portfolios are often well diversified, so investors with a suitable risk profile can take on this risk in exchange for potential growth over the long term.

Investing in the theme will typically mean having greater exposure to companies from Asia, given its rapid AI development, and the United States, given its push to become the global leader in AI.

In cybersecurity, ETFs will likely include U.S. or Israeli companies. In the current climate, some clients have moral apprehensions with investing in Israel, so advisors should gauge client comfort before offering it as part of the know-your-client process.

In the short term, investors can consider precious metal ETFs such as gold bullion ETFs as falling interest rates put downward pressure on currencies. Canadian dollar–denominated assets are also an option in this lower-rate environment since the Bank of Canada is easing rates quicker than the U.S. Federal Reserve, which is putting downward pressure on the U.S. dollar.

Jonathan Rivard
General partner and financial advisor, Edward Jones, Toronto

It’s easy for clients to get excited about themes like clean energy and electric vehicles, but I advise them not to chase performance and recognize that thematic funds can be more volatile than broad-based ETFs. I don’t own any thematic ETFs.

At my practice, seeking out thematic ETFs is a completely client-driven process. While I won’t take that concentration risk for most clients, I will educate them on thematic ETFs if they ask.

Although most clients have the right level of exposure, diversification and risk with broad-based ETFs, some investors are emotionally tied to certain themes that fit into their interests. For example, clients working in the tech industry might be interested in cloud computing or cybersecurity ETFs — those are themes that come up most often.

If a client is interested in a theme, I try to understand what got them excited. Most of the time, they’re excited about past performance and will want to replicate those gains. While it can look tempting, it could lead to buying high and selling low as themes move in and out of vogue.

I remind clients that many thematic investments have only existed for a few years and have a shorter track record than broad-based ETFs. As such, thematic ETFs may not fit their risk tolerance or investment horizon.