That's not a megatrend. THESE are megatrends. (And this is how to play them)

The word megatrend gets thrown around a lot, but to properly qualify it has to satisfy set criteria, says Kanish Chugh, Head of Distribution at ETF Securities. 

• A megatrend must be a long term structural shift that is transforming economies
• A megatrend must be in an area of high innovation and disruption
• A megatrend must be government-supported
• A megatrend must be intertwined with demographics

In short, a real megatrend is not a buzzword or a fad. Working from home, for example, does not qualify because it is a "medium-term'' phenomenon. A real megatrend is something like the invention of the automobile, says Chugh, or, in the present day,  "decades-long trends, like robotics ... semiconductors, or battery technology." 

Chugh points to globally ageing populations, vast emerging consumer markets, and raised consciousness around health and environment as spaces where megatrends and their underlying thematics present enticing opportunities.

In this wire, he makes the case for thematic-based ETFs as the best way to play them, allowing investors to back an underlying megatrend. "Be that biotechnology, robotics and automation or cybersecurity, or e-sports, investors have an ability now to take a view on a theme."

This transcript has been edited for clarity

Can you explain what a megatrend is?

The word megatrend gets thrown around a lot, but it is important for investors to be aware that a megatrend is long-term and not just the fad of the moment.

A megatrend is a structural shift that transforms economies, and at ETF Securities we believe there are four ways to identify them. One, it must be a long-term structural shift that transforms economies. Two, it must be in an area of high innovation and disruption. Three, it must have government support, and four, it must be intertwined with demographics. For example, the car and the inception of the automobile is classified as a megatrend, while something like working-from-home is considered a medium-term theme. It definitely has legs, but it's not a 10 year+ long-term megatrend.

Luckily here in Australia, in terms of the ETF world, we don't have many ETFs that provide exposure to fads. Most of the thematic ETFs available are very much looking at megatrends.

What megatrends are we seeing in today’s world?

Megatrends are difficult to identify. They can be abstract and overlapping, but we believe there are four main categories to group them by, including:

Transformative technology. This is quite broad, but it includes things like being able to complete this interview virtually during a lockdown, or areas such as robotics, automation, and artificial intelligence (AI).

Society and lifestyle. This looks at things like the connected world that we live in through social media, or areas such as emerging markets. An interesting stat that often gets thrown around is that in Japan, they sell more adult diapers than they do baby diapers. This example shows the ageing population in developed markets, but also the emerging market consumer opportunity. It is a consumption story that could present an interesting opportunity.

We then have health and wellness. COVID put a bit of a spotlight on this megatrend, but within this space, it's more than just COVID. Whether it's looking at alternative medicines or biotechnology (which is the development and research into vaccines and other treatments) it really is an area of growth.

Then finally, we have environment and resources. Again, the whole concept and idea of clean energy and clean technology really is an area that's only going to continue to develop.

In today’s world, some of the megatrends we identify include robotics, automation and artificial intelligence, semiconductors and battery technology. They’re themes that aren't going away in the next 18 to 24 months, they're not going away in five years, they're going to be with us for many decades to come.

Why should megatrends be an important consideration for investors?

What we have found recently is that a lot of younger investors want to align their portfolios to their views and values. But this can be difficult to do when they've only been presented indexes or ETFs with very broad exposures. A thematic ETF provides them with the ability to take a view on an underlying megatrend without diluting the exposure.

Let’s take ETF Securities’ ETFS Morningstar Global Technology ETF (ASX Code: TECH) as an example. This ETF focuses on the technology sector and looks at deep technology and the companies involved in the hardware or software area of this sector. Companies like Microsoft and IBM.

Now, the ETF looks at the technology sector, but people might say, "Well, the NASDAQ-100 Index is the technology index."

But the overlap between a pure-play tech sector ETF and the NASDAQ-100 Index is roughly 17%. So, there are similarities, but there's not a complete overlap. This demonstrates that when you're investing in some of these broad market indexes, you're not always receiving a pure exposure.

Now that is fine, but people need to be aware that if you want pure exposure to a megatrend, a thematic ETF provides you the ability to obtain that exposure.

How does an ETF capture a megatrend?

An ETF captures megatrends through the tracking of the indexes of their licensee.

Let’s take ETF Securities for example, we have a range of thematic ETFs and are looking to broaden out this range. When we're developing our products, we want to ensure that we're licencing an index that truly reflects the thematic we want to give investors exposure to. Not all ETFs are created equal, so it is extremely important to lift the bonnet and look under the hood to ensure the ETF is true to label.

To capture the robotics, automation and artificial intelligence megatrend, we partnered with a firm called ROBO Global. ROBO Global is the premier index provider and index manager of the ETFS ROBO Global Robotics and Automation ETF (ASX Code: ROBO). This fund has a portfolio of nearly 90 stocks focusing on robotics, automation and artificial intelligence.

ROBO Global provides a unique method to index construction through a blended approach of passive and active. The index has fundamental active research through their research team and strategic advisors.

Their team consists of experts in robotics and automation who are tasked with uncovering market leaders and market innovators in this field. When you look at ROBO’s portfolio, you’ll find companies such as iRobot and John Deere. iRobot is famous for its robotic vacuum cleaners while John Deere produces tractors. Both companies are opposites in terms of product offering, but both are creating innovative technology with the use of robotics, automation and AI.

How can thematic based ETFs help increase global exposure for an investor?

When looking at thematics, I think it is important for people to understand that they need to be sector-agnostic, and sometimes even country-agnostic, to ensure they are not limiting their choices. It can be quite easy to have a lens on Australia, but really, they need to be thinking more broadly.

An investor doesn’t want to be locked into a particular country. I say that because themes are country-agnostic. You've got companies around the world that are innovating in a particular theme.

Let's take the ETFS Battery Tech & Lithium ETF (ASX Code: ACDC) as an example. It looks at the thematic of battery technology and lithium, which has had a lot of interest of late due to government support for renewable energy.

This ETF has nearly 35 companies in its portfolio and provides exposure to a vast number of developed market countries including South Korea, Japan, Europe, US and Australia.

Can you provide an example of one thematic based ETF that is capitalising on a megatrend?

A good ETF to explore to capitalise on the megatrend space is the ROBO ETF. When you think about the megatrend of robotics, automation and AI, it's more than technology, it’s the way of the future.

As previously mentioned, ROBO is backed by strategic advisors who are industry experts. Experts like Daniela Rus, director of the Computer Science and Artificial Intelligence Laboratory at MIT. When they launched the index back in 2013, there was nothing available that could provide pure-play exposure to this thematic. So, with the help of academics, like Daniela, they were able to create their own by identifying the megatrend and then defining the 11 sub-sectors within it.

Thematic ETFs like ROBO have really innovated this passive industry. No longer are ETFs plain and boring, no longer are ETFs purely there for the lazy investor who just wants to build a very simple portfolio. They are now sophisticated tools built to satisfy a specific need. 

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