Megatrends can make investors a lot of money. Day to day life provides us with many examples of such trends. The explosion in ETFs means many of these trends such as thematic investing are only a click away. In fact a quick look around ETFs provider websites will highlight a treasure trove of ideas.
How can I identify some megatrends
What are the risks involved
Where can I invest in them
A megatrend is a powerful force which is likely to disrupt how we do things. Whereas a trend is pointing to a direction of travel, a megatrend is likely to lead to life altering changes. In business this is likely to lead to new companies becoming overnight oligopoly examples, as they are able to be provide the necessary software and services required to meet this new megatrend.
It is often best to follow the money! A quick trip around major ETF providers will show you what other investors are backing. Each ETF displays how much money is invested in it.
This highlights which megatrends are the most supported, with the option to back them yourself. Different providers will use different words to help you find them:
Savy non-US based investors should keep an eye on the US-based websites of major ETF providers, as this is often where megatrend ETFs are first made available. Few EU based platforms will allow you to buy US listed ETFs due to the lack of a KID document. (A worthless box ticking document introduced by European regulators).
A way around this, is to buy some of the top 10 holdings of the ETF megatrend you want to back. You can then benefit as US, (and subsequently) rest-of-the-world investor money flows into them. This will provide support and momentum to these stocks. UK platforms will require you to fill out a W-8BEN form to buy US stocks.
The megatrends of today are linked to technology. Technology helps us to simplify tasks, and do them faster and with greater precision. Investors looking to tap in to today’s and tomorrow’s megatrends should bear in the mind the following:
There are risks to investing in megatrends. Share prices are increasingly being driven by retail investors who have little idea of what they are doing. Few would even know what is an annual report let alone what it contains. This means ETFs can gain in value due to emotion based trading and easily become overvalued stocks.
It is telling that iShares Clean Energy is the most bought and sold (by volume) security on the German stock market. Such popularity suggests it ‘is being traded’, with the spectacular increase in options trades probably the driver. As a result buy and hold investors should beware that it will behave like one of the most volatile stocks.
For an ETF to be profitable for the provider, it needs assets of over $100m. There is a risk that under this number the ETF gets withdrawn and closed by its provider. An ETF which was created over 2 years ago and has only $50m is unlikely to be around long. This is also a sign of a lack of interest by investors.
The size of the ETF relative to its creation date is also revealing. If it’s assets are under $100m and it was created within the past 12 months, then you may be timing it well as a first mover. It can take time for investors to back a trend. An ETF worth billions is unlikely to notch up significant future gains as investors have already backed its trend.
The major ETF providers (there are others!) such as
will each have offerings in different trends. Few will cater for each megatrend so it is worth looking around each web-site for the best upside risk potential.
It could be argued that the best trend to follow today is to buy what the new breed of retail traders will buy next! In the March 2020 Coronavrius sell off, Big tech/Tesla stock was their focus, with renewable/clean energy being their latest focus.
Joking apart, when buying into a megatrend, you should check the top 10 underlying holdings to see if you understand what they do, and whether you think the downside risk is worth it. Paying attention to cost is also important, you should not be paying more than 0.7% for an ETF.
Also watching the share price can help you identify which sort of investors are buying it. A sharp move downward could be little more than a general sell off or a sector rotation, but increased volatility may be a sign to move on.