Megatrends: How to align your ETF portfolio with global developments

Nobody can hide from the megatrends. They are the irresistible waves of change that are transforming the economic, social and political fabric of the world. The megatrends can create and destroy entire industries and markets. They can push new actors onto the economic stage. They can force a rapid reorganisation of businesses and supply chains. And they can make 20th Century Sci-Fi prophecies come true as Artificial Intelligence replaces people in the workplace and self-driving cars become a reality. 

Investors can benefit from the megatrends too via new ETF products designed to harness their power. The first theme ETFs have been available in Europe since 2007, but the development was accelerated when ETFs with the abbreviations ROBO (robotics) or HACK (cybersecurity) came onto the market in the USA. And where the US leads, Europe is bound to follow; there’s now increasing momentum around megatrend ETFs here.

Investors have already invested over 11 billion euros in the approximately 40 megatrends ETFs that are tradable in Europe (as of 30/06/2020). The focus lies on ETFs for automation and robotics, cybersecurity, ageing population, global infrastructure and world nutrition. ETFs on megatrends such as renewable energy, e-mobility and diversity still have to assert themselves. The largest providers of megatrend ETFs in Europe are iShares, Legal & General (LGIM) and Lyxor. In the meantime, however, many smaller providers such as HANetf or VanEck have also developed special themes in their product range.

So let’s take a look at the main dynamics and how you can gain exposure to them.

  

Megatrend: ageing population

It’s well known that global populations are ageing due to declining birth rates and/or rising life expectancies. Naturally, this has major implications for business models, especially those linked to the healthcare industries. Some companies are well aligned with this megatrend, especially those that are working on new medical treatments and pharmaceuticals targeted at age-associated diseases such as Alzheimer's, cancer, arthritis, etc. 

Megatrend ageing population ETFs:  

• iShares Healthcare Innovation UCITS ETF
• iShares Ageing Population UCITS ETF
• iShares Nasdaq US Biotechnology UCITS ETF
• L&G Pharma Breakthrough UCITS ETF
• HANetf GINS Indxx Healthcare Innovation UCITS ETF

Megatrend: technological progress and automation

Futurists like Ray Kurzweil believe that technological progress is accelerating exponentially. Moore’s Law is the most famous example of this thesis as it posits that computer processing power doubles approximately every 2 years. Advances in computing power and associated technologies like AI are expanding the abilities of machines to compete with or complement humans, and companies are racing to be at the forefront of the ‘rise of the robots’. 

Megatrend technological progress and automation ETFs:

• iShares Automation & Robotics UCITS ETF
• L&G ROBO Global Robotics and Automation UCITS ETF
• Lyxor Robotics & AI UCITS ETF Acc
• iShares Automation & Robotics UCITS ETF
• HANetf HAN-GINS Innovative Technologies UCITS ETF

Megatrend: digitalisation and information technology

The digital disruption of existing industries has already transformed music, media, communications, retail and financial services among others, and it shows no sign of slowing down. Countless start-ups are currently plotting the disintermediation of vulnerable legacy firms and hoping to join the likes of Facebook, Amazon, Alphabet, Netflix and Uber as the stars of the future.

Companies are already using the growing field of artificial intelligence today. The entertainment industry is turning into a digital entertainer with computer games and streaming. With crypto tokens, Web 3.0 is ready to shake up the structures of the rapidly growing platform economy of Web 2.0. In the future, this trend will presumably be unstoppable.  

Megatrend digitalisation and information technology ETFs:

• iShares Digitalisation UCITS ETF
• Lyxor MSCI Digital Economy ESG Filtered (DR) UCITS ETF - Acc
• WisdomTree Artificial Intelligence UCITS ETF USD Acc
• Invesco Elwood Global Blockchain UCITS ETF A
• VanEck Vectors Video Gaming and eSports UCITS ETF A
• HANetf EMQQ Emerging Markets Internet and Ecommerce UCITS ETF
• HANetf HAN-GINS Cloud Technology UCITS ETF
• L&G Ecommerce Logistics UCITS ETF USD Acc
• First Trust Indxx Innovative Transaction & Process UCITS ETF Class A Acc

Megatrend: cybersecurity

Of course, society’s increasing reliance on the internet simultaneously increases the threat of potentially devastating cyber-attacks by hackers. IT security has become big business as attacks have become more widespread, sophisticated and damaging. Increasing awareness of these risks and the real harm they can do means we can safely assume that cybersecurity companies will be in demand for the foreseeable future. 

Megatrend cybersecurity ETFs:

• L&G Cyber Security UCITS ETF
• Rize Cybersecurity and Data Privacy UCITS ETF
• First Trust Nasdaq Cybersecurity UCITS ETF A
• iShares Digital Security UCITS ETF USD (Acc)
• iShares Digital Security UCITS ETF USD (Dist)

Megatrend: global infrastructure development

Rapid urbanisation and global population growth create huge opportunities for companies involved in the construction and maintenance of infrastructure. According to UN forecasts, more than two-thirds of the world's population will live in urban areas by 2050. That figure was less than 50% in the year 2000. As 2 billion more people move to the cities, the need to develop sustainable infrastructure that can cope with the scale of change will become paramount. 

Megatrend global infrastructure development ETFs:

• SPDR Morningstar Multi-Asset Global Infrastructure UCITS ETF
• iShares Global Infrastructure UCITS ETF
• Xtrackers S&P Global Infrastructure Swap UCITS ETF 1C
• iShares Emerging Market Infrastructure UCITS ETF
• Invesco Morningstar US Energy Infrastructure MLP UCITS ETF Acc
• Invesco Morningstar US Energy Infrastructure MLP UCITS ETF Dist
• L&G US Energy Infrastructure MLP UCITS ETF

Megatrend: e-Mobility and new energies

A growing world population creates an enormous need for energy and mobility. More efficient mobility concepts such as self-propelled electric vehicles and energy generation from renewable sources are inevitable megatrends in order not to burden the environment and the climate even more. 
 
Megatrend new energy and e-mobility ETFs:

• iShares Global Clean Energy UCITS ETF
• L&G Battery Value-Chain UCITS ETF
• iShares Electric Vehicles and Driving Technology UCITS ETF USD (Acc)
• Lyxor MSCI Future Mobility ESG Filtered (DR) UCITS ETF - Acc

Megatrend: nourishment of the global population

Rising populations, income levels and industrialisation naturally increase the demand for staple foods and clean water. When adding unequal distribution of water resources and growing pressure on our existing reserves from climate change, contamination and overuse this results in the megatrend nourishment of the global population. 

Megatrend nourishment of the global population ETFs:

• iShares Global Water UCITS ETF
• Lyxor World Water UCITS ETF D-EUR
• iShares Agribusiness UCITS ETF
• L&G Clean Water UCITS ETF USD Accumulating ETF

Megatrend: diversity and equality

The disparity in opportunity between the genders, otherwise known as the gender gap, continues to diminish as women increasingly make their mark in the upper echelons of political, social and commercial institutions. One encouraging indicator is that the gender gap is considered closed in education and health, according to a study by the World Economic Forum. Greater awareness and support for the integration of minority groups has even resulted in investments that enable you to express your views on this trend. 

Megatrend diversity and equality ETFs:

• Lyxor Global Gender Equality (DR) UCITS ETF C-USD
• UBS ETF (IE) Global Gender Equality UCITS ETF (USD) A-acc
• UBS ETF (IE) Global Gender Equality UCITS ETF (hedged to GBP) A-acc
• iShares Refinitiv Inclusion and Diversity UCITS ETF USD (Acc)

Megatrends may not give you the edge

While megatrends are having a huge impact on the world and ETFs are ideal for investing broadly and cost-effectively in global financial markets, some financial theorists are critical of the idea that you can successfully use such megatrend phenomena to boost your returns. Be aware that if you tilt your portfolio towards particular sectors then you may not be rewarded for the risk in the long run and there’s no guarantee you will outperform a more diversified, passive investment strategy. You should, therefore, think through the following points of criticism before deciding to invest in megatrend ETFs:

• Some scientific studies show that potentially above-average industries cannot be reliably identified in advance. Although they may succeed in outperforming the market, this is unlikely in the long term.
• For the investment in the still young industries to be worthwhile, the stocks on the stock market would still have to be cheaply valued. However, it is often the megatrend companies that are already in the focus of investors and are, therefore, expensive. In order to make the investment particularly worthwhile, the stocks in the megatrend ETFs would still have to be significantly undervalued today. Since the terms ‘megatrend‘ and ‘hype‘ often fall in the same breath, the probability of this happening is low.
• The indices on which the ETFs are based require comparatively much effort. After all, a large number of companies must first be examined and, if necessary, identified as being in line with megatrends. Megatrend ETFs are therefore somewhat more expensive. A cheaper alternative could be sector ETFs into which megatrend companies grow over time through their success and the resulting increase in market capitalisation.
• A narrow selection of individual titles is detrimental to diversification. This increases the risk of equity investments. The megatrends ETFs currently available on the market generally contain a relatively narrow range of 25 to 150 shares.
• Many megatrend ETFs are still small and have a volume of fewer than 100 million euros. The past has shown that such ETFs are disproportionately often threatened by a later fund closure.

If you would still like to invest in megatrends then here’s a list of the Megatrend ETFs in our ETF database plus a summary of the largest players in the table below.

Top 10 Biggest Megatrend ETFs