Foraying into structural trends through indexing


Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Why does thematic investing make sense now despite choppy market conditions?

At BlackRock we believe that thematic investing makes sense at all times. Our role as an asset manager is to help investors navigate short-term cycles to benefit from long-term structural trends. Focusing on our thematic ETF (exchange traded fund) range is a great illustration of how we’re able to leverage BlackRock’s extensive resources to identify key future macroeconomic rotations early on and adapt our positioning accordingly.

Is indexing the best way to gain thematic exposure?

What differentiates thematic ETFs from standard-listed indices is that they are composed of a targeted selection of stocks not constrained by sector or region – they are selected by theme. One of the challenges in thematic investing is in establishing investible themes. To address this, BlackRock has defined five global disruptive forces that we believe are structurally changing the world and conducts extensive research into how to express and invest in the opportunities that arise from them. One of the traditional barriers to thematic investing has been the additional cost associated with hand-picking stocks on an active-management basis, but this is changing. As datasets improve, and as companies disclose more data, asset managers have the freedom to develop solutions to bridge the gap between active investing and indexing approaches. While iShares’ thematic range does not hand-pick specific stocks to invest in, systematic methodologies have been developed to find companies that are exposed to given themes.

How can thematic investing allow investors to respond to a changing macroenvironment?

Another benefit that’s driving the growth of thematic investing is accessibility. Investing presents a plethora of options across sectors. Add to that sustainability concerns and it can become daunting to understand how investments relate to the real world. Thematic ETFs are accessible to investors, with the perceived market opportunity being clear and upfront. In the case of iShares’ funds, the themes are also intrinsically linked to many of the UN Sustainable Development Goals. The thematic products are particularly good at providing stories which investors can easily understand and invest in. When investors understand the opportunity better, it also helping them to stay invested for the long term.

What is BlackRock’s Essential Resources range?

Our Essential Resources range is composed of various themes including global water, clean energy, timber, forestry and agribusiness. The overarching theme behind this range is to ensure access to clean air, water, food and energy security – in other words, covering the basic essentials for society. Climate change is the biggest risk to all of the above today. We’re currently experiencing droughts across Europe and an increasing need to provide water conservation emergency regulations. This spills over into agribusiness – once again linked to the volatility in weather patterns, the demographic explosion that we’re seeing, and the increase in protein intake. As a consequence, we need to increase crop yields using dwindling resources in terms of land, water and rural labour. So, all of the above require serious investment and implementation of sustainability criteria.

How is sustainable investing incorporated into your thematics products?

Our sustainability screens constantly evolve as industries mature. Clean energy is a great example, as it’s also one of the funds in iShares’ Essential Resources range. If we look back to the fund’s launch in 2007, the portfolio was very concentrated and structurally limited to around 30 companies. Originally, it didn’t have any sustainability screens in place, partly due to the lack of sheer availability of clean energy companies and partly due the lack of quality data. Over the past ten years or so, we introduced carbon emissions screens and broadened our investment universe to include companies committed to creating clean energy.

How do you engage with index providers to ensure products continue to meet ongoing regulations?

As an asset manager, we have to constantly monitor and actively ensure that these indices continue to track the theme itself. This includes tracking regulation changes, as well as changes in investors’ expectations. Sticking with sustainable investing for a moment, this area has seen tremendous growth and has become an important consideration in investment decisions, especially for European investors. The short answer is: we simply have to engage. We are constantly discussing best practices with our index providers, working closely with them to build a more sustainable future.

Omar Moufti
Thematics and Sectors Product Specialist
Omar Moufti is a member of the iShares EMEA Equity Product Strategy (EPS) team, leading the Sector, Thematics & Commodity strategy pillar. The team is responsible for providing insights, content, and analysis.