Today, BlackRock’s iShares arm released its report on the megatrend themes it expects to see accelerating in 2022 and beyond. Those three trends include digital transformation, automation and next-generation oncology. Much of that acceleration will be a continuation of trends that emerged during the global COVID-19 pandemic.
iShares has identified five megatrends: technological breakthrough; demographics and social change; climate change and resource scarcity; rapid urbanization; and emerging global wealth. Those five broad trends have driven the launches within iShares’ lineup of thematic ETFs.
That offering includes both actively and passively managed ETFs, which cater to different types of investors.
The active funds are designed for those investors who trust the ETFs’ managers to weight the themes within a broad category. The passively managed ETFs in the suite are for investors with strong convictions about individual themes who want to customize their thematic exposure, according to Jeff Spiegel, iShares’ head of megatrend and international ETFs and the author of the report.
“I would characterize it as a do-it-for-me versus a do-it-myself approach,” he said.
Digital Transformation
With remote work and online retail exploding during the global pandemic, the digital transformation is well on its way, with the cloud, in particular, consolidating its importance. The report by BlackRock indicates that global spending on cloud services is expected to grow from $332 billion this year to $397 billion in 2022, with 70% of organizations already using cloud services expecting to increase their spending in that area next year.
The report additionally notes that the rise of 5G, which is expected to reach 60% of the global population by 2026, will likely further facilitate that transition.
Spiegel says that only 12% of companies have moved their core applications to the cloud, so there is significant room for growth in the category, while the increasing sophistication of hackers and ransomware attacks have crystallized the importance of cybersecurity.
Among the BlackRock ETFs covering this space are the actively managed BlackRock Future Tech ETF (BTEK) and the passively managed iShares Virtual Work and Life Multisector ETF (IWFH), the iShares Cybersecurity and Tech ETF (IHAK) and the iShares Cloud 5G and Tech ETF (IDAT).
Automation
The pandemic continues to provide a major boost to the automation theme identified by BlackRock, with supply chain tangles, wage inflation and manufacturing demand all cited in the report as catalysts for greater adoption of automation and artificial intelligences.
The report notes that 67% of companies have ratcheted up their automation capabilities due to the pandemic, with the size of the robotic process automation market expected to grow from just $2 billion in revenue in 2018 to $14 billion in 2028.
Spiegel also points out supply chain disruptions could continue into 2023.
“As that dawns upon companies, they [know they] have to make their supply chains more resilient. And some of that means bringing production back home. Doing that cost effectively requires automation, especially in a world of wage inflation,” he added.
The report further notes that the increased attention to automation will manifest across all major industries, including the electric vehicles space.
In addition to BTEK, iShares also offers the passively managed iShares Robotics and Artificial Intelligence Multisector ETF (IRBO) and the iShares Self-Driving EV and Tech ETF (IDRV).
Next-Generation Oncology
The genomics space was crucial in developing and launching the mRNA vaccines that are helping to bring an end to the global pandemic, but the area has even greater implications for oncology therapeutics, where immunotherapies can provide what the report calls “precision treatments” that specifically target cancer cells. The report further notes that oncology is already the largest therapeutic area and is likely to reach $250 billion in sales by 2024.
“We think it can be a great year for cancer treatments, and an important reminder that there are a lot of diseases threatening us and that we have to focus on, even in a world where one of them is obviously taking all the headlines,” Spiegel said.
BlackRock offers the actively managed BlackRock Future Health ETF (BMED) as well as the more targeted and passively managed iShares Genomics Immunology and Healthcare ETF (IDNA).
Incorporating Themes In A Portfolio
“If you take a look at the average portfolio, relative to any one of these thematic ETFs, you’ll find that thematic ETFs tend to have more of a small- and midcap tilt to them,” Spiegel explained. “They tend to be more global than the average portfolio. They tend to have a little more concentration in technology communication services than the average portfolio.”
Because BlackRock focuses on pure-play exposure in its thematic ETFs, they tend to tilt toward small- and midcap exposures, often excluding more diversified large cap companies. The issuer recommends exposure matching when incorporating thematic ETFs into a portfolio’s equity sleeve, making sure investors’ thematic exposure fits with the amount of small- and midcap exposure they desire.
By doing that, Spiegel says investors can add a 10-20% allocation of thematic exposure to their portfolio’s equity sleeve without affecting the portfolio’s overall market risk, but adding some active risk into the mix.