The fourth quarter is already more than 2 weeks behind us but due to an increasing workload and my Spanish classes, I wasn't able to get to my quarterly report. Luckily I found some time so let us jump right into it!
Last Updated on June 8, 2020 by Mr. FightToFIRE
More and more thematic funds are being released on us: from agriculture to solar energy. It’s won’t help you keep a simple portfolio, but if you are interested in dabling in other areas than a region-based portfolio and don’t mind doing some futurology -yes that’s a thing- I’d like to go over a few interesting options.
I don’t necessarily have invested in these 5 themes, but they do look interesting. It also comes with a fair warning. The odds aren’t in your favor if you decide to place a major stake in thematic funds.
Picking the right future
But what if, to supplement or personalize a country-specific fund portfolio, you would be interested in thematic funds? I mean, Who doesn’t sometimes dream of investing in dynamic sectors hoping their investment doubles or even triple in a few years? But identifying favorable long-term mining trends that have not yet been factored into prices in specific sectors is a cumbersome process. And wanting to profit from it on the stock market quickly turns out to be very complicated. It’s basically the same as stock picking.
Just thinking of wanting to invest might already create questions in your head: which (promising) sectors to invest in? Will the technology of the future be the technology that will breakthrough, knowing that the cards between winners and losers are constantly being shaken? Is the sector of the future listed at a fair and interesting price or has it become too expensive to enable a return on returns?
On top of that, we shouldn’t forget that the young sectors have only now experienced a first difficult period due to the coronavirus. It makes it difficult to know how they will react in the case of continued market stress.
To help you out with all these questions, I look at 5 themes often presented as “future” sectors, i.e. sectors with high growth potential or that have already shown some of their potentials.
I selected the following themes based on the possible profit potential and the risk level. Finally, with each theme, I give an example of an investment fund. These investments should only be considered as an addition to an already diversified portfolio and for a very limited part of your investments -I’d say max. 5% of your total investment portfolio-. I have put them from most interesting to least. Especially the last two are for me personally interesting to look at but nothing more. They are more to show how even seemingly interesting themes can be dangerous.
Some tips before you start predicting the future
- Invest only a small part of your investments in the sectors and do your due diligence when looking into specific sectors.
- Take into account the risk that you are willing to take. A sector fund is not very diversified by definition. The volatility of a sector fund can be high. It goes against the basis of what most would consider safe and “average”.
- The costs associated with the fund distributors can quickly become very high. Compare the costs between the various options and opt for the lowest if you only expect the execution of your order from your broker. Realize that you will pay more for this specialized fund than if you were to invest in say, a global tracker such as IWDA or VWRP.
It’s not hard to imagine why I place water first. As global climate change is taking shape, water scarcity is becoming worse as the years and decades go by.
It’s increasingly felt on a global scale. According to the reference journal Nature, about a hundred large cities such as Los Angeles, Jaipur, San Diego, Porto Alegre, Lima … will have serious water scarcity camps by 2020. By 2050, more than half of the global population (57%) will live in areas that suffer water scarcity at least one month each year (Boretti & Rosa, 2019).
The situation already seems to be critically in cities such as Cape Town, Mexico, Melbour-ne or Sâo Paolo. The population growth and associated urbanization, the lack of infrastructure investment (watter loss due to obsolete distribution networks) and climate change are limiting the supply of water, taking increasing demand into account.
Pros and cons
The increasing need for water, the need to replace the obsolete installations and the fight against the pollution of the underground water reservoirs are positive elements for the water sector at the fair. However, the market still largely depended on government orders, which does not always make private companies (price control, investment investments, risk of nationalization, etc.) profitable and investors happy. This economic sector still has a large number of small and medium-sized groups, which allows for new approaches in order to improve profitability. The market is divided into three major categories: the water distribution systems (pipes, pumps, the sanitation of water (purification, pollution …) and distribution.
You can invest in water through an etf like WATL (Lyxor World Water UCITS ETF D-EUR, FR0010527275) or IH2O (iShares Global Water UCITS ETF; IE00B1TXK627). Their TER isn’t low at 0.60% and 0.65% respectively.
In the long term, the sector is stimulated by well known trends such as:
- Population growth: According to the United Nations, the world population will number ten billion people by 2050 (compared to seven billion today)
- Aging: According to the World Health Organization, the number of people over the age of 60 in the world population will almost double between 2015 and 2050 (from 12% to 22%).
- Lifestyle (unhealthy living, stress, pollution): This has resulted in an increase in the number of patients with chronic diseases such as diabetes, cancer, neurodegeneration disorders (Alzheimer’s, Parkinson’s …).
Pros and cons
All of the above trends are promising research areas for labs, especially because many diseases still do not have treatment or the treatments are far from being all patients can heal (cancer …). This makes health a theme with lots of hope for a bright future of new and very innovative treatments and (immune)therapies. In addition to the pharmaceutical labs, manufacturers of medical equipment (Abbott, Johnson & Johnson, BectonDickinson) also benefit of the trend.
But there are risks of course. Ever-tighter government budgets and motivated by the abuse –Martin Shkreli anyone?– that has come to light in recent years prices are pressed down for medical products (medicines, equipment and equipment).
This is especially so in the United States, where prices are set by the companies, but where the buyers (purchasing centers of the hospitals, insurers …) have grown and demand many discounts and even a restriction on the use of medicines. Innovation is therefore central to the concerns of the sector, which is refocusing on treatments that offer high added value and for which the pressure on prices is less. As a result, labs often focus on the same domains, which further intensifies competition. In addition, the risk of failure in the development of the product portfolios is indeed real. And with medical equipment, it is not rare for products to be recalled due to quality issues.
Investing is possible through tracker WHEA (SPDR World Health Care ETF; IE00BYTRRB94) or XDWH (Xtrackers MSCI World Health Care Index UCITS ETF 1C; IE00BM67HK77). Most trackers in health have relatively low TER (15% – 30%).
Robotics & automation
The robot and automation sector has been growing at lightning speed for several years and is no longer only making the front page of the trade magazines. Based on the robots that have been used for years in the assembly sector, where the work is hard, the latest developments in the field of artificial intelligence are gradually being integrated. This artificial intelligence enables robots and automation systems to learn, among other things, to help people better in various fields such as surgery for ‘simple’ interventions, detecting diseases, self-driving cars …
Pros and cons
Robotics have helped the wind to reduce labor costs and increase productivity. In the United States, wage growth and low unemployment are pushing companies to expand their robot park to defend their profitability. However, the market remains very dependent on China, where the robotization rate is still low: 531 industrial robots for 10,000 employees in Korea compared to 176 in the United States and 49 in China. The latter figure will rise to 150 by 2025. The world market is expected to grow by 10 to 15% annually in the coming years.
The sector is generally profitable for the companies represented in it. Depending on the investments of the companies, the robotization and automation sector remains tied to the economic cycles. A growth slowdown will have an impact on the sales level.
The sector is split up into large groups such as ABB (Switzerland), Rockwell Automation (USA) … for which activity is only a limited part of their main activities … and smaller groups such as Fanuc (Japan), Kuka ( Germany) for whom robotising is the core activity.
The speculation surrounding this dynamic sector and the buyback prospects between the groups have supported the prices of the sector in recent months. Although the commercial potential of the sector has not yet been exhausted, the price of many values already largely takes this dynamism into account. Although the sector is not very expensive taking into account the growth prospects (double-digit profit growth for many companies), it seems more prudent to wait for a correction before showing interest in it.
ROBO Global Robotics and AutomationGO UCITS ETF (IEooBMW3QX54) is an ETF that benefits from a good geographical diversification of its assets. The heaviest item represents only 2% of the portfolio, which limits the impact on ET F in the event of a setback for any of the values. The ETF largely invests in medium-sized companies that develop robots or automation solutions.
The term ‘fintech’ or financial technology includes companies that use technology (and data analysis) to invest in the financial sector and thus cause a disruption on the financial sector. Often it are startups that fill in the gaps that major banks, the insurance giants, etc leave, to offer new services at lower prices. In these services, there is usually a direct connection between supplier and customer, skipping the in between step.
There are a variety of companies on the market, ranging from private lending platforms to companies that enable payments or propose asset management tools. Major financial players estimate that no less than 25% of their business is threatened by these emerging competition. Realizing that it is dangerous to allow this competition to grow, the established values (BNP Paribas, ING, VISA …) have been tempted to buy those fintechs or to enter into partnerships (think Payconiq/Bancontact in Belgium) with them in order to create technologies and develop them yourself.
Pros and cons
The development of data analysis technologies will contribute to the growth of the sector in the coming years. The appetite for finance and the digitization of the financial sector have pushed up stock market prices making a purchase in this theme a higher risk. What are those risks?
- Tthe sector is still young and the environment may change in the coming years (regulations …)
- A not insignificant part of the companies in the sector has a almost no history to judge how they will fair in the long run.
- In the sector, where one technology can dislodge the other in just a few months, the viability of the companies can be rapidly shaken. In other words, they themselves can become victims of groundbreaking innovation. It is impossible to know who will emerge as the winner and which technology will last.
Only one tracker is available for European traders (due to PRIIPS): FTEK (Invesco KBW Nasdaq Fintech UCITS ETF; IE00BYMS5W68). I personally will not look at this since it’s a limit find size -and size kinda matters– and the TER isn’t the lowest either at 0.49%.
The cyber security sector is regularly in the spotlight due to the increase in computer hacks and espionage on a large scale between countries like China and the US.
Recently, the Melt-down and Specter vulnerabilities discovered on Intel and AMD processors have raised concerns. In May 2017, the Wanna-Cry virus generated the biggest hacker attack ransom in history.
there are many more in recent history and I’m not even mentioning the specific breaches in computer programs such as Adobe, Canva or sites like eBay, LinkedIn and many others.
In addition to traditional industry players specializing in antivirus programs such as Symantec (Norton), new players appeared who specialize in general IT network security or potential threat detection. Palo Alto Networks, Check Point Solutions, Fortinet, and Trend Micro are among the industry’s biggest.
Pros and cons
The growth in this sector seems tempting since the last couple of years were particularly rich in cyber attacks. Current and to be expected technological evolutions strengthen the need for security, including the development of dematerialized IT (cloud computing), the increase in mobile terminals, the self-driving car and the connected objects that pose all possible threats to a computer network intrusion.
The problem is that the specialist companies mentioned above, get gobbled up by the tech giants or in worst case, get competed out of the market because they can take advantage of their financial strength and their large presence. These big companies (Alphabet, Cisco, etc.) are attracted by the growth prospects of the sector. Alphabet is present in cyber security through Chronicle which recently announced the launch of it’s first commercial product in called a Backstory. IBM offers cyber security services. And Intel was of course the forerunner with the acquisition of McAfee in August 2010.
In terms of trackers there really are only two: ISPY (Strategy of L&G Cyber Security UCITS ETF; IE00BYPLS672) and CYBP (Rize Cybersecurity and Data Privacy UCITS ETF; IE00BJXRZJ40). With a respective TER of 0.75% and 0.45%. It makes these trackers not really interesting given the risks.
- Boretti, A., Rosa, L. Reassessing the projections of the World Water Development Report. npj Clean Water 2, 15 (2019). https://doi.org/10.1038/s41545-019-0039-9. Retrieved from https://www.nature.com/articles/s41545-019-0039-9