More Asian Investors Choosing Thematic ETFs

Megatrend-themed ETFs are becoming a core element of many investment portfolios across Asia Pacific, according to experts from BlackRock.

Making sound investment decisions is rarely a straightforward task, and it has become even more challenging due to the growing uncertainties in the current business environment. Unsurprisingly, investors aiming to safeguard their investments and generate steady returns in volatile markets are increasingly focusing on the opportunities created by megatrends, which represent long-term structural shifts that are expected to change the way we live.

According to BlackRock, which has approximately 40 billion U.S. dollars of thematic ETFs and index assets under management (AUM),¹ there are five megatrends that not only transcend current economic and geopolitical events but, in many cases, are reinforced by them.

These include climate change and resource scarcity; demographics and social change; emerging global wealth; rapid urbanization; and technological breakthroughs.² «The definition of a megatrend is a trend that can shape our society and economy,» said Claire Cheng, Strategist for Thematic Investing, APAC ETF and Index Investments, BlackRock.

A Multi-Trillion-Dollar Opportunity

Consider the «demographics and social change» megatrend, which addresses the emergence of Asia as a global economic powerhouse. The region, with its young and upwardly mobile population,³ is on track to exceed 50 percent of global gross domestic product and account for 40 percent of global consumption by 2040.⁴

As demand ramps up across the region, the retail sector alone is estimated to present a 10 trillion U.S. dollar growth opportunity for businesses.⁵ There is also the «climate change and resource scarcity» megatrend. This trend encompasses the ongoing global effort to move to a net-zero economy, which is estimated to require capital investments worth as much as 100 trillion U.S. dollars by 2050,⁶ and the business opportunities created by these inflows.

Technology, which is at the core of all these megatrends, continues to transform industries, ranging from healthcare to real estate, as demonstrated during the pandemic.⁷ Looking ahead, the emergence of new concepts, such as blockchain, provides fresh potential.

With the value of blockchain’s contributions alone estimated to exceed 3 trillion U.S. dollars by 2030,⁸ investors are paying close attention to the long-term opportunities created by the rapidly evolving world of technology. 

Spotlight on Technology and Sustainability

According to a survey of institutional investors,⁹ 84 percent of respondents intend to increase their exposure to ETFs in 2022, with the three most popular themes being ESG, technology, and digital assets. «From an investment rationale perspective, we are big believers in the two themes of sustainability and technology,» Cheng said, adding:

«They are also the hottest topics among the investor community.» Drilling further down into these megatrends, Cheng identified clean energy and semiconductors as key sub-themes to track. While renewables form a crucial part of many countries’ energy transition strategies,¹⁰ semiconductors are now the lynchpin of the global economy, powering everything from smartphones to automobiles.

Demand has grown in line with a rapid global economic recovery, which has, in turn, worsened an ongoing supply shortage,¹¹ and the world’s chipmakers have seen their revenues grow impressively.¹² «Semiconductors play a key role in today’s digital economy … and they are the key enablers of many innovations,» Cheng said.

«The companies that make semiconductors have stronger pricing power, having benefited from this chip shortage, and we expect them to continue to do well for the rest of 2022.» BlackRock’s 34 globally listed thematic ETFs are designed to provide exposure to each of these megatrends and aim to outperform the market over the long term.¹³

Investing with a long-term horizon is important in the face of market challenges such as inflation and increasing global geopolitical tensions.

Thematic Investing Attracts Interest in APAC

As investors recognize the benefits of thematic ETFs – which enhance investor access to megatrends in an efficient and cost-effective way – the AUM of ETFs is growing across Asia Pacific. «The wealth segment is the leading client base when it comes to thematic adoption in Asia,» noted Georgina Mitchell, iShares Specialist, Asia ex-Japan Wealth Distribution, BlackRock.

While the U.S. and EMEA remain the biggest markets globally for thematic investing, millennial Asian investors are turning to thematic ETFs. This demographic, which finds ETFs easy to understand, is largely drawn to topical themes, such as blockchain, electric vehicles (EVs), clean energy and green tech, according to Mitchell.

Additionally, there has been a large shift in the role thematic ETFs play in a portfolio. Asian investors are moving away from using thematic ETFs as a satellite instrument, and increasingly including them in their core portfolios as a strategic holding, Mitchell noted.

«Across all age ranges, clients are aware that thematic ETFs are something that they need to incorporate into their investment proposition in order to future-proof their portfolio.» The thematic investing trend is translating into growing demand for more data supporting the evolution of global megatrends, and insights into future themes.

Getting the most out of thematic ETFs

This need is ably satisfied by BlackRock’s sizable research team, which provides actionable intelligence to clients on both current and upcoming themes to consider. «Not only are investors in APAC increasing their usage of thematic ETFs, but they also share what future themes they want to see covered in our product range,» Mitchell said.

«Most of BlackRock’s thematic ETFs are global in exposure, but Asian investors are requesting more domestic exposures, with Asia- and China-focused themes. In fact, some of our recent funds have been launched on the back of this client demand.» Cheng also noted that it is important to recognize the emergence of a structural trend early on and act quickly to capture the opportunity to get the best out of thematic investments.

Mitchell agreed, noting that investors should «think about which themes really resonate with them, and which they truly believe will play out in the long term.» Overall, thematic ETFs offer a cost-effective, transparent, liquid and easily accessible opportunity for investors to diversify their existing portfolios by gaining exposure to the markets and industries benefiting from the megatrends transforming our world.

¹BlackRock, as of 20 April 2022.
²BlackRock: «Megatrends insights on the forces shaping our future», February 2022.
³McKinsey Global Institute: «Asia-Pacific should use its increasing wealth more productively», January 2022.
⁴McKinsey: «Asia’s future is now», July 2019.
⁵McKinsey: «Driving Asia’s $10 trillion consumption growth opportunity», October 2021.
⁶BlackRock: «A sea change in global investing», April 2021. For illustrative purpose only. Subject to change. There is no guarantee that any forecast will come to pass.
⁷CB Insights: «25 Industries & Tech Shaping The Post-Covid World», December 2021.
⁸Australian Government, Department of Industry, Science, Energy and Resources: «The National Blockchain Roadmap», 2020. 
⁹Brown Brothers Harriman, Global ETF Investor Survey, March 2022.
¹⁰World Economic Forum, «These countries are leading the transition to sustainable energy», April 2021.
¹¹Bloomberg: «Wait Times for Chips Grow Again in March as Shortages Drag On», April 2022.
¹²Economist: «How TSMC has mastered the geopolitics of chipmaking», May 2021.
¹³BlackRock, as of 30 April 2022. 

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