How to allocate Megatrend ETFs in your portfolio

Sep 28, 2022
  • Jeff Spiegel

The below is a Q+A between Jeff Spiegel, U.S. Head of iShares Megatrends, International and Sector ETFs, Fritz Folts, Chief Investment Strategist at 3EDGE Asset Management, and Eric Biegeleisen, CFA, Deputy CIO at 3EDGE Asset Management.

3EDGE is a leading multi-asset investment management firm serving institutional investors, the advisor marketplace, and private clients, and manages over $1.6 billion in combined AUM and AUA.1

Chart image
  • The world is changing rapidly, and clients understand this. Investors are looking for ways to access long-term, structural growth themes across sectors, geographies and market caps. While broad equity markets have enjoyed strong returns over the past decade, events of the past few years ranging from the pandemic to geopolitical conflict to inflation have led investors to seek out potential areas for durable growth. Traditional, market-cap weighted benchmarks tend to have negligible exposure to exciting themes such as genomics, clean energy and cybersecurity,2 meaning intentional decisions could be required to access these themes. According to a recent survey of 386 institutional investors, 88% of investors are looking to add Megatrends exposure in the next five years.3

  • We view Megatrend ETFs as transparent, liquid, cost-effective tools that provide exposure to specific companies that are levered to a particular theme. These ETFs allow portfolio managers to focus more on allocating to specific themes rather than individual companies, offering more portfolio diversification than a single stock selection approach and without the constraints of a sector approach. Megatrend index ETFs are designed to provide beta to different themes; these ETFs leverage a variety of strategies for security selection such as data-driven revenue screens or bottoms-up, fundamental research. These ETFs also typically take a bespoke approach to weighting that is unique to each subtheme, with the common goal of providing thematic beta.

  • At 3EDGE we have conviction in a variety of Megatrends themes. We also have an extensive track record of active investing, and we believe using Megatrend ETFs to express our thematic views allows us to tactically shift our views depending on our market convictions.

    We’re very excited by the prospect of using megatrend ETFs to access thematic exposure for our clients. Many of the themes cut across sectors and geographies, making it difficult for traditional strategies to capture, and so its nice to have a suite of products to draw from to more adequately and easily express our views and manage our risk.

  • Megatrends is among the fastest growing categories of ETFs, seeing inflows of $80B+ over the past few years, massive growth for a category which started 2020 with roughly $35B in total assets!4 So, the demand has clearly been growing. Megatrend ETFs offer investors a way to access a theme they may have conviction in, and we think we are still only seeing the start of it. According to a recent survey, 50% of investors see a greater need for thematic models.5 As the number of Megatrend ETF offerings grow investors might have to increase their due diligence of the different fund offerings, as an alternative some investors could look to ETF models as an area to consider for diversified exposure to a variety of themes.