Sector and Thematic Investing with ETFs

President Trump has managed to complicate the world economy. International trade has been hampered by tariffs and restricted passage. Executive orders have distorted the economy by lighting a fire under some companies and extinguishing others! Oil prices have rocketed, inflation, interest rates and bond yields have risen and yet gold has not. Some companies are trading at way over 100 P/E (TSLA x340, AMD x160) while others are valued at less than x20 P/E (Micron, Cisco, IBM).

It is difficult to know where to invest and how to invest safely!

Sector Investing vs. Thematic Investing

Thematic investing is often confused with sector investing, but there are some key differences. Sector investing puts investment funds into specific segments of the economy. Popular segments include energy, healthcare and information technology. Thematic investing is different; it uses broader technological advances to improve output spanning across multiple sectors. Popular themes include clean energy and robotics.

Sector Investing

• Specific segments of the economy
• Funds tend to be larger to encapsulate the industry
• Driven by industry trends
• Energy, Healthcare, IT

Thematic Investing

• Span segments of the economy
• Funds have a narrow focus with fewer companies
• Driven by ideas, beliefs, values, and disruption
• Clean energy, robotics, AI, health, biotech, scarce resources, infrastructure, cybersecurity, luxury and lifestyle

Often these can become blended.

State Street have a number of ETFs for sector investors, they have US, World and EU versions...

Here is a chart for S&P companies...

For the week ending Oct 2, we can see that S&P Tech is beginning to rise, but Energy, Healthcare and Financials are weakening.

For the EU however (see above), Energy and Materials are starting to show strength while financials are weakening. I am hopeful however that the Europe Banks ETF BNKE will begin to take off again soon due to the new EU payment system which will steer millions of people away from Mastercard and Visa (EU retailers should pay lower charges) .

I can create a portfolio of Sector ETFs and check which are trending upwards over 1 month to 10 years (I used my simple ukcgt.xyz trend tool)...

Using this tool, we have Tech, Energy (oil) and Health as winners. Finance is OK but at the bottom we have Real Estate, Staples, Consumer Discretionary (Amazon/Tesla, etc.) and Commodities.

The AI explosion

At the moment, it seems Tech, health/biotech and finance are still looking strong. This fits in with the explosion of AI (or should I say SI?) because these three area can benefit the most from AI.

Factories, Retail and Commerce should also be able to use AI to increase profits and reduce costs but this will be only apply to a subset of businesses rather than all of them.

I am yet to be convinced about self-driving cars and lorries. Hiring an unqualified driver is relatively cheap and easily replaced. Employing expert mechanics and recovery personnel and equipment is not cheap. Accidents are also not cheap. Maintenance becomes the responsibility of the company and not the self-employed driver. Is this economic model going to be profitable?

Legal firms are using AI a lot and this should improve their efficiency, but since their markup is enormous anyway and you pay by the hour for a person's time, won't this reduce their income as well as their costs?

AI cannot replace personal services, social workers, mental health workers and skilled workers.

However, all companies will use AI for their financial work, HR, logistics, engineering, research, training, manufacturing, etc.

Most AI companies say they have cannot meet demand. Power seems to be the limiting factor. They can build AI data centers and fill them with CPUs, memory, cooling, etc.  but just can't plug them into power.

Also, companies will not want to use Software-as-a-Service companies that are unreliable, especially when they are not in control of costs. Most companies will want their own, 24x7 AI servers with known uptime and costs, even if it does not run the latest AI version.

This explains the recent steep rise in results from such server companies as SuperMicro, Dell, HP, Cisco and Lenovo.

I hold HPE and Lenovo LHL, but not DELL (yet). SMCI is not a strong buy and has quite a big downside, Cisco CSCO would be a safer buy but the future forecast is not great. Lenovo seems to show the greatest value and future promise at the moment (but don't hold me to that!).

Summary

Tech seems very strong and still the top performer mainly due to AI. Longer term, biotech and finance should also show good growth. Commodities should begin to take off if/when inflation bites. Energy is too volatile for me to touch. 

For tech ETFs, I can buy IITU (acc.) in my ISA and WITS (dist.) in my GIA.

BioTech

For BioTech, ARCG (acc.) has returned over 90% in 6 months and 24% in 3 months. This is a high risk - high reward though. BTEE (dist.) or BTEK (acc.) has shown 40% growth in 12 months and holds 250 companies for a less volatile ride.

This article is not advice. Your mileage may vary!