Skip to main content

Invest in three structural themes through ETFs

Building a portfolio of trackers can be quite simple if one wants to “buy the market” and invest in a handful of trackers like this one grafted onto the MSCI World. Or one can try to make a difference by capitalising on a few structural themes that, due to the strength of the trend, should potentially outperform the market average over the longer term. We put forward three themes that could qualify for this and list some trackers that capitalise on them and can be included in a portfolio or savings plan.

The healthcare sector today is fully benefiting from several favourable structural trends that should see it grow more strongly than the economy in the coming years and corporate profits grow faster than the overall average. And these underlying trends are more robust today than ever. For one thing, the world’s population is ageing at an ever-increasing rate, which will lead to greater demands on healthcare. Especially in the rich West, ageing will strike quickly. On the other hand, huge technological innovations are driving unprecedented innovation and transformation. Among other things, the turnaround time of clinical research phases is greatly accelerating.

And ultimately, this will ensure that better healthcare becomes more accessible and affordable to more people, and the industry will have the wind in its sails. The breakthrough in obesity drugs, with Denmark’s Novo Nordisk as an exponent, is a good example. Today, the stock market is already taking more notice of the sector’s robust growth prospects but at an expected P/E ratio of 25, the World Health Care sector is not yet overpriced.

Incorporating a touch of healthcare into a portfolio or integrating it into a savings plan should ensure outperformance over the longer term. Trade Republic’s offering includes a dozen Health Care trackers. One can buy the MSCI World Health Care index, which is 70% made up of large US companies such as Eli Lilly, UnitedHealth Group and Johnson & Johnson, among others. That can be bought in USD, EUR and with or without dividend payout (see table above). In addition, one can consider going entirely for US companies in the sector via the S&P 500 Health Care USD (ISIN code: IE00B43HR379) or opt for their European counterparts via the MSCI Europe Health Care EUR (ISIN code: IE00BMW42181). In the latter, Novo Nordisk (21.44% of the portfolio), Novartis (13.41%) and Astra Zeneca (12.63%) make up the top three.

The Paris Climate Agreement, which came into force just under eight years ago, sought to respond to global warming by setting concrete targets. The agreement’s ambition was to limit the global temperature rise to 2 degrees Celsius (and preferably actually 1.5 degrees) compared to pre-industrial values. A very important measure in limiting warming is slowing down greenhouse gas emissions in general and CO2 in particular. Specifically, greenhouse gas emissions must be reduced by 80-95% by 2050 compared to 1990. To achieve this, more and more steps are being taken in a transition to a climate-neutral future.

And while awareness is growing, we are still only at the beginning of investing in sustainability and climate change. And much more needs to be done to achieve a real turnaround. Indeed, a lot of figures suggest that too little is being done. And the same goes for investors who are only now starting to think about the impact of climate change on their portfolios. Many do not realise that climate risk is an investment risk, no more no less. At the same time, climate transition offers huge investment opportunities. After all, green and sustainable companies are likely to be rewarded on the stock market in the coming years and will also be able to be financed at a lower cost of capital.

This theme also deserves a place in a diversified portfolio or savings plan. However, it is not a simple theme that is very broad and can be filled by several sub-themes. To invest in climate change via a tracker, there is only one option at Trade Republic: the MSCI Europe Climate Change EUR (ISIN code: LU2056738490). The tracked index, the MSCI Europe ESG Climate Transition (EU CTB) Select Net Total Return Index, is made up of 176 European companies that are notable for their climate efforts. In fact, it is the crème de la crème of the European stock market landscape.

The topic of energy transition is, of course, closely linked to climate change and offers investors a more practical take on the theme we raised above.

With energy transition, we are facing possibly the biggest turnaround in human history. And governments around the world are accelerating their transition plans. The US, for instance, introduced the Inflation Reduction Act, good for 370 billion in subsidies for energy transition and investments in green technology. The European Commission, through its Next-GenerationEU fund, also wants to spread subsidies around. According to the International Energy Agency IEA, renewable energy capacity would increase by 2,400 gigawatts over the 2022-2027 period, accounting for 90% of all additional electricity capacity added over that period. All those figures to show you that the investments are and will be immense.

We put forward two ways to invest in this theme through clean energy or commodities that will enable the transition. Both market segments have been struggling for a while, mainly due to higher interest rates that have turned many business models upside down and made many projects unprofitable and unrealistic. The Global Clean Energies ETF (ISIN code: IE000U58J0M1) lost 30% of its value over the past 12 months while the Energy Transition Metals ETF (ISIN code: XS2425848053, chart below), which bets on transition commodities, lost 20% over the same period.

This decline of both trackers makes it extra interesting to get in now. On the one hand, because many renewable energy companies have adapted to the new reality, while investments will continue given the need and, on the other, because demand for metals will, after all, go through the roof in the coming years, especially if we want to implement the electrical revolution. And at the same time, investment in resource extraction and mining is at its lowest level in 19 years: in other words, a substantial shortage is imminent.

This content is sponsored by Trade Republic.

Disclaimer: The information provided in this text is for general informational purposes only. The author of this text is not a certified financial adviser and does not provide investment advice. All investment decisions should be made on the basis of the author’s own research, considerations and insights. Investing in financial instruments involves intrinsic risks. It is possible that investments may decrease in value and lead to financial loss. Investors should be aware of the potential risks and carefully evaluate their own risk appetite before making investment decisions.


Author BBFI

More posts by BBFI