In August, investment manager VanEck forecast that the acceleration of flows into thematic exchange traded funds (ETFs) would see funds under management (FUM) reach $10 billion by the year's end. With the launch of ETF Securities’ new Semiconductor ETF on the ASX recently, the strong investor interest in capturing price growth in the technology sector through ETFs continues to accelerate.

According to ASX data, the assets sitting inside thematic ETFs totalled $3 billion at July 2021, up from $2 billion at the start of 2021– a 50% increase in just six months. Of these products, three of the top five best performing in Australia in the 2021 financial year aligned to technology, with ETFS Battery Tech & Lithium ETF (ACDC), BetaShares S&P/ASX Australian Technology ETF (ATEC), and ETFS FANG+ ETF (FANG) leading the way.

It is no surprise that technology continues to be a theme that resonates with investors. Mat Tilley, Head of Markets & Client Solutions at AUSIEX, said that the interest in technology ETFs seems to reflect the old adage that you should invest in what you know: “Technology is all around us and so key to our daily lives now that when investors look to supplement an already diversified portfolio that is predominantly Australia-based, it makes sense to invest in the sectors whose products we see and touch every day but are not as strongly represented on the local stock market.”

The recent media coverage of tech darlings like Afterpay is also seeing investors looking to get in early and capture growth.

“Technology is a growth sector, but it is also so diverse as a theme – we’re seeing this in the products that are being released that cater to the differing niche segments within the broader umbrella.”

Kanish Chugh, Head of Distribution at ETF Securities says that thematic ETFs are increasingly used by advisers and their clients as ‘satellites’ that help tilt the full portfolio in a certain direction. “They're looking at certain things that they want to target. If they're not sure, the tech ETF gives them that diversified blanket approach, but if they want to look specifically at semiconductors, this is an easier way to do it.

“Thematic ETFs are solutions for investors to make these kinds of choices. What Australia didn't have 10 years ago was choice. Now, we've got the ability to make those decisions. Our newest ETF, SEMI, for example, is the first ETF in Australia focused on this industry and from our analysis set a record for the highest first-day trading value of any passive ETF in 2021 at approximately $5 million,” Chugh says.

ETFS Semiconductor ETF (SEMI) is the latest thematic fund from ETF Securities and, while there are a range of established semiconductor ETFs available in offshore markets – particularly the US - SEMI is the first ETF in Australia focused on this industry. SEMI invests in the biggest and most influential semiconductor companies in the world, responsible for the bulk of global microchip production. The product tracks the Solactive Global Semiconductor 30 Index, which is a portfolio of 30 companies in developed markets, plus Taiwan and South Korea, which are active across the semiconductor value chain. The Index is up by more than 56% over the 12 months to August and more than 23% year-to-date.

Chugh says semiconductors can be seen as a subset of technology indices or ETFs that include everything from hardware to software, retail and social media. But they are also a beneficiary of a number of separate megatrends around which ETF Securities likes to create thematic funds.

Semi-conductors have been part of our lives for decades now. The ever more powerful and tiny chips at the core of central processing units for electronics entered the popular consciousness in 1971. That was when the term “Silicon Valley” was coined about the number of companies making these chips in the San Francisco Bay Area. Fifty years on, the industry is far from maturing. According to Chugh, the sector is set for a sustained growth phase driven by transformations in the way we work, shop, communicate and travel.

“The best way to explain it is as oil to a motor vehicle. The new oil is semiconductors because we're moving towards a space where in certain industries the reliance upon electronics or microchips - semiconductors - is becoming more and more.”

So strong has been the demand for chips at a time of disruption caused by COVID-19 that there are shortages for some sectors. Automakers Ford and General Motors have suspended production of some vehicles and US President Joe Biden has ordered an inquiry into supply chains that may be too reliant on China, particularly for chips and high-capacity batteries. Ordinarily a shortage of supply would stimulate new entrants to the market but high barriers to entry, long investment cycles and an uncertain short-medium term outlook mean this has not yet occurred. Such conditions have been supportive for chip prices and for chip makers’ earnings, in turn driving their share prices higher.

SEMI is a good example of how ETF issuers are now facilitating investor access to some niche sub trends within the broader technology megatrend.  With such strong investor support and a flourishing ETF market, it is a process that is likely to continue.