Thematic ETFs ‘add a little bit of sizzle’ to portfolios, strategist says

ETF Trends Head of Research Todd Rosenbluth sits down with Yahoo Finance Live to talk about considering thematic ETF investing, BlackRock's interest in blockchain tech, and ETF trends to pay attention to in 2022.

Video transcript

BRAD SMITH: Everyone, BlackRock is the latest firm to launch a blockchain themed ETF, as interest in crypto has prompted a wave of new assets for investors to explore. Here with us now is Todd Rosenbluth, who is the ETF Trends head of research for our ETF report brought to you by Invesco QQQ. Good to have you here with us today, Todd. First and foremost, as we see more thematic ETFs like this emerge, what goes through your head? What types of inflows do we typically see when these are announced?

TODD ROSENBLUTH: Well, these products often take time for investors to get used to and comfortable with and understand the differences between what BlackRock has offered and some other firms like Global X or Amplify or others that have a blockchain ETF.

But what we're really seeing is that advisors are building their portfolio, often using a lower cost core, and then using thematic ETFs to round that out to add some potential reward opportunities. And they're looking at various themes. So Blockchain is one of those themes. We're seeing cybersecurity. We're seeing electric vehicles become popular over the years. Lots of different choices for investors and advisors to build their portfolio with.

BRAD SMITH: How do you perceive that some of the new themes that have come out, especially since we're on the topic of blockchain-based ETFs, some of the kind of different components coming into these, really focusing around what the future of cryptocurrency or Web3 or blockchain may look like and the major players within that? I believe within this particular one from BlackRock, so much of the weighting is actually just Coinbase. So with all of that in mind, what type of attraction towards blockchain do we expect to see versus some of the other thematic ETFs that there have been in the past?

TODD ROSENBLUTH: So you're right, Coinbase is a large holding within this BlackRock ETF, but it's also diversified. So you have more traditional technology companies and some financial services companies. So you get that benefits of diversification. But this is a longer term investment theme. And so it's been down. As you mentioned, blockchain ETFs historically have struggled in the past year. So this is perhaps a good opportunity for iShares to launch and for investors to get in on the lower end, as we get a longer term potential upside.

You've got to be looking long-term with these thematic oriented ETFs. They require a longer time horizon and some patience for these themes to play out. And we're seeing advisors that are building portfolios using two or three or four of these themes in small doses to round out the portfolio to add a little bit of sizzle with their core part of their portfolio.

BRAD SMITH: You said long-term. What is that time frame and that horizon that people should be keeping in mind, as they're exploring ETFs? And thematic ETFs specifically.

TODD ROSENBLUTH: Well, many of these themes that we're talking about like blockchain or electric vehicles, these are going to take a few years before they play out. So investors either need to have patience with that individual theme, or they need to look longer term and be able to combine a couple of ETFs. So for example, we wrote a piece at ETF Trends in ETF Database looking at the electric vehicle theme and IDRV, which is the iShares product, and DRIVE, which is the Global X ETF. Electric vehicles is a longer term time horizon.

We've just seen the potential benefits last year from congressional spending towards electric vehicles, but this is a 2024, 2025, 2026 time horizon before electric vehicles become much more mainstream. And so an ETF like IDRV is going to have the benefits. We're seeing investors moving into these products over the last couple of years, but IDRV is going to have more upside potential over the longer term than it is just necessarily in 2022.

BRAD SMITH: Todd, for my own edification and perhaps that of some of our viewers as well, what type of cadence do we typically see on the rebalancing front when it comes to thematic ETFs?

TODD ROSENBLUTH: So each product is going to be different. We typically find that companies are going to at least rebalance on an annual basis. Sometimes, it's every six months. But what they look to do with some of these thematic ETFs is be relatively quick when there is initial public offerings. Their goal is to get exposure to these various themes and do so when some of these new and emerging companies come to marketplace.

And especially with a theme like blockchain, or even electric vehicles, for that matter, you're going to see some of these companies that are emerging that were not around a year or two ago. And what we'll see in the portfolio in a year from now, some of those companies are still private at the moment. So IDRV, for example, you're going to get the broad benefits throughout the supply chain of electric vehicles, and you're going to see companies, including automakers, as well as technology companies, the suppliers that fit into that, so that you get a broad exposure to this overall theme.

BRAD SMITH: Something that overlaps with all of the industries that we've discussed is actually cybersecurity. What type of response, what type of inflows have we seen there recently, especially amid the international conflicts that's taking place and so much renewed focus on cybersecurity?

TODD ROSENBLUTH: Yeah, so cybersecurity was the first of those original themes. So the ticker HACK has been around a while. We have IHAK from iShares. We've got a BUG, B-U-G, from Global X to name just a few of those products. I guess another one I'll throw out there, CIBR, from [INAUDIBLE]. Sorry, I have to dump as many of these tickers out to make sure the audience knows the range of different options that are out there. We're seeing new interest in some of these products because of what's been going on.

And we're seeing-- however, the performance that we're showing on the screen for a HACK, as well as some of those other products, just shows you that there has not been a straight line up, given that we've had the war going on in Ukraine. Technology oriented companies have been out of favor. And ETFs like BUG and CIBER, those ETFs, including HACK, have been more volatile. So investors, again, need to have patience with these longer term themes.

BRAD SMITH: Yeah, I remember when HACK was sub 30s I think back in 2017 or something like that. Todd Rosenbluth, who is the ETF Trends head of research, joining us here today. Appreciate the conversation insights.