Given the mixed opinions about how the main global equity indices are constructed and “slavishly followed,” he points out obvious market flaws. At present, China, the second largest economy in the world, has an index weighting of only 5 per cent, compared with over 60 per cent for the US. India accounts for about 17 per cent of the total global population but only 1.3 per cent of the index, he said.
“I suspect that eventually size will matter when it comes to economic dominance,” and they will catch up, Miller said.
As for technology’s growth over the last 20 years, Miller argues that it wasn’t captured by conventional investment tools such as yield, price/earnings multiples or even profitability. “Those who took the leap into uncertainty by creating a technology sector side pocket, unaffected by index weightings and independent of their core portfolio, have been well rewarded,” he said.
That being said, assets flooding into passive index-tracked ETFs grew at an annual rate of over 20 per cent last year. Thematics grew by almost 80 per cent.
Monitoring by Morningstar shows that performance doesn't always match growth. In the year to March, more than two-thirds of thematic funds outperformed the MSCI ACWI index. However, over five years that drops to below one third, with a fifth of thematic funds being retired.
Batteries and robots
So far this year, some of the most heavily trafficked ETF themes have been in battery technology and robotics, according to market watcher ETF Securities.
“Taking figures from the beginning of the year to the end of June, flows into ETFS Battery Tech and Lithium ETF accounted for more than 36 per cent of total flows over the period,” head of distribution, Kanish Chugh, said.
Healthcare, cybersecurity and cleantech are examples of benchmarks that Indxx has been constructing for issuers. “US and global infrastructure indexes have also done very well for us,” Sharma said. Space is another big theme.
With larger issuers such as iShares also launching thematic ETFs, he believes that the market has reached critical mass.
ESG interest and more self-directed investors are playing their part.
“You can look at the growth from two perspectives,” Sharma said. “First, retail investors are asking their advisors for these types of exposures. We have seen great adoption of our climate change solutions index outside of the US, not as much here in the US, so part of it is retail investor driven.
“Another part, of course, is the pension funds and institutions realizing that this is an area they need to focus on from an ethical perspective.”
Regionally, the firm has seen rapid product innovation in Europe and high-growth in the Middle East. Israel in particular has shown interest. Over a billion dollars of ETF assets In Israel are tracking its products, he said. The firm also named South Korea, Japan, Taiwan, Hong Kong, Australia and Singapore as territories using its services more.
Indxx divides revenue research of companies into three buckets.
The first is for pure play companies generating 50 per cent or more of their revenues from that specific theme. “In some cases we might include what we call quasi-play companies, which are companies typically generating between 20 and 50 per cent of revenue from that theme.”
For an emerging theme, where only a few companies are represented, indexers might include marginal companies generating at least some portion of their revenue from the theme, he said.
Timing is everything in benchmarking in evaluating the availability of investable companies.
With research typically revenue based, how does the firm account for risk; if, for example, a company is doing something questionable for its reputation that could blow up later and damage revenues?
“In some cases and some industries, typically the smaller and newer industries, we also include a monthly corporate governance review.”
He said the firm did this for a recently-launched SPAC index.
“If there is an admission of a violation of any laws, if companies have paid fines in the past or entered into settlements, those are some examples of behaviors that have gotten them excluded,” he said.