2 ETFs for Thematic Investors - YouTube

Welcome to Morningstar. I'm Holly Black.  With me as Kenneth Lamont. He is an analyst  

at Morningstar. Hello. Hello, Holly. 

So, Kenneth, if we've been talking all things  thematic investing this week and some investors  

might not realize that actually quite an easy  way to gain access to trends and themes in  

the market is through passive funds or ETFs.  Why is that such an effective way to do this? 

Well, so, when you are investing in ETFs, you are  getting all the benefits of passive investing. So,  

you are getting a transparency; you are  getting intra-day trading if you need it,  

which you may not, and also relatively low  cost. So, with thematic funds you must also  

pay attention to cost because they are not as  cheap as the very cheapest passive options. But  

they are very pleasing and simple and  straightforward way of accessing a theme. 

So, I think people might usually think of a  tracker fund as buying the MSCI World or the S&P  

500. Obviously, it's a bit different when we are  talking thematic. So, what are some of the risks? 

Yes. Well, the first risk I suppose is that  when you compare with broad market exposures,  

these funds tend to be very narrow. So, you  are not getting the full diversification  

benefit you would with a broader fund. And this  brings with it a higher expected volatility.  

The second sort of increased risk is that these  funds tend to fish lower down the market cap  

spectrum than the sort of broader market cap  alternatives. So, again, you are looking at  

a higher expected risk there as well. 

So, let's look at a couple of funds in a bit  more detail. I know you've been looking at  

the theme of energy transition. So, what  are a couple of the funds in that area? 

Yes. Well, the first one I'd like  to talk about today is the iClima  

Global Decarbonisation Enablers ETF. And I like  this one specifically because I'm sure many people  

are familiar with the alternative energy ETFs  that are available out there on the market. They  

are very large. They've been very successful. But  I like this one because it really targets in on  

companies that are trying to solve a very  specific climate solution, so looking at  

decarbonizing our world. And from an investment  point of view, I like the way that it builds in  

a tech element which really gives you exposure  to a growth profile perhaps you wouldn't get  

if you were just looking at the broadest  alternative energy or energy transition theme. 

Okay. And what is another fund you like? Well, so I've been saying for many years now,  

I think the water is a very interesting  theme and the case for investment in water is  

really compelling if you look closely at it.  This is a scarce resource and perhaps in the  

world it isn't talked about enough and it's  something that really has to be dealt with  

over the coming years. So, if we're really  looking at long-term investment opportunities,  

I still believe that this is a really good space  to look at from an investment point of view. 

So, with that in mind, I'd like to talk  about the L&G Clean Water ETF. And again,  

much like the iClima Fund, I like this because  unlike the larger and more traditional water ETFs,  

which tend to have a large exposure to utilities,  this fund actually really targets in on  

tech solutions to the global water problem. So,  again, it builds on sort of a growth tilt to  

an exposure which frequently has a value tilt  when taken as a broader segment of the market. 

So, what kind of stocks might I expect  to see in the portfolio for this one? 

Yeah. So, water tech, so the Xylem Inc (XYL), for  example, a water technology company, and really,  

companies that really focus in and trying to  solve the key water problems that we have. 

Kenneth, thank you so much for your  time. For Morningstar, I'm Holly Black.