Megatrends: How to align your ETF portfolio with transformational global forces

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Nobody can hide from megatrends. They are the irresistible waves of change that are transforming the economic, social, and political fabric of the planet. At the same time,, they have the power to create and destroy entire industries and markets. Megatrends are altering our global security architecture and, with the help of ETFs, they allow us to invest in long-term, structural dynamics that are remoulding society.

The key megatrends

Considering the big picture, the most important megatrends are:

• Climate change and sustainability - Denoted by investments in renewable energy, clean water supplies, biodiversity protections, and circular economy solutions.
• Demographics - Think of the impact of shrinking and ageing populations on healthcare, working practices, and wider society. Plus the related fluctuations in political sentiment around immigration and the intergenerational contract.
• Disruptive technology - This megatrend traces major leaps forward such as the digital economy, the rise of robotics, and the emergence of generative AI.
• Geopolitical and economic power shifts - The rebalancing of global wealth and industrial might from the West to the rest is rewiring trade flows, destabilizing the international order, and calling time on the era of unchallenged US dominance.
• Urbanization - The long term trend of migration from rural areas to economically vibrant cities is projected to continue - with the change most pronounced in Asia and Africa. The opportunities lie in infrastructure firms and smart city technologies that can facilitate urban growth in the years ahead.
• Social change - The cascade of economic, technological, and political adjustments that lead to positive social developments like rising gender equality and also negative outcomes such as increasing wealth inequality.

Investing in megatrends

Investors leverage megatrends by investing in ETFs that democratize access to high-growth sectors, making it easier for retail investors to participate in transformative industries. Also known as theme or thematic ETFs, these investments enable you to adjust your portfolio’s sails to capture the winds of change. For example, we believe that the core of most people’s portfolios should be built upon broadly diversified products like an MSCI World ETF. However, even a megacorp like Apple only occupies around 5 % of the MSCI World. While Tesla weighs in at well under 2 %. The strength of a globally diversified ETF is that your portfolio is not dependent on the fortunes of a small sliver of the stock market. All the same, you may wish to concentrate more of your capital on firms you think are poised to profit from the unfolding megatrends. Perhaps the war in Ukraine convinces you that, whatever happens next, the West will ramp up its defence spending. Moreover, militaries will surely re-equip their forces to deal with new battlefield realities such as drone warfare. In that case, you could compare the range of defence tech ETFs that have been launched since 2022. By taking a relatively small position in a themed ETF like this, you tilt your portfolio to ride the geopolitical megatrend. This is only one example, but it shows how you can slot thematic ETFs around your core holdings, to express your views on the most consequential megatrends.

Which are the most popular megatrends?

We can find out by totalling the assets under management (AUM). This metric reveals the amount of wealth investors have committed to the various thematic ETFs worldwide:

Top 5 thematic ETF strategies by AUM

1. Net Zero: €69.2 billion [$72.7 billion]
2. Global Infrastructure: €30.8 billion [$32.3 billion]
3. Digital Infrastructure: €19.4 billion [$20.4 billion]
4. Disruptive Technology: €16.1 billion [$16.9 billion]
5. Cybersecurity: $16.6 billion [$17.4 billion]

We’ve also categorized the wide choice of thematic ETFs under each megatrend, so you can zero in on the ones that interest you most. The central theme here is the transition from a post-Cold War equilibrium centred on the US as the sole remaining superpower to a multipolar world of competing alliances. Overshadowing all calculations is the relationship between a polarized US and a rising China. The existing hegemon and the challenger power are economically interdependent in ways that defy comparison with previous historical rivalries. Nonetheless, increasing geopolitical tension has caused the US to embark on a path of deglobalisation. Both Trump and Biden have moved to contain China and near-shore critical industries and resources. A tectonic realignment of trade relationships is underway, and the outcome remains tantalisingly in the balance. Simultaneously, the war in Ukraine and Russia’s hybrid attacks on European democracies have completely transformed the strategic calculus on the continent. Sweden and Finland have ended long-standing policies of neutrality for good reason. To explore this megatrend, delve into:

• Cybersecurity ETFs
• Semiconductor ETFs
• Defence ETFs
• Space ETFs

For a broader take on deglobalisation and near-shoring, think about potential winners and losers. For example, single country ETFs that may benefit from supply chain diversification include:

• Vietnam ETFs
• India ETFs
• Mexico ETFs

Thailand, Malaysia, and the Philippines are also strong possibilities. Yet another angle is the race for rare earth minerals and other strategic materials used in high-tech products, defence systems, and the renewable energy transition. Search Basic Materials in the ETF screener and look for keywords such as:

• Rare earth metals
• Strategic metals
• Energy transition metals
• Disruptive materials
• Future economy metals

The world’s top 10 stocks today are dominated by firms that won the ‘Internet’. In so doing they eclipsed the previous generation of behemoths representing big oil, big pharma, big banks and traditional retailers. Now the AI boom has propelled Nvidia and Broadcom into the stratosphere. Meanwhile, megacaps such as Apple, Microsoft, Alphabet (ex Google), Meta (ex Facebook), and Tesla are all betting heavily on AI to maintain their lead. In truth, innovation occurs in overlapping waves, as breakthroughs trigger rapid advances in some technologies while others plateau. Think of how AI usage exploded after the 2022 release of ChatGPT-3. That giant leap in capability sent expectations skywards and investment capital flooded into AI research. By contrast, AI progress has crawled along in previous decades. So much so that the term “AI winter” was coined to describe the scale of disillusionment. Also recall how the Dotcom Bust of 2000 to 2003 wiped out the early pioneers of ecommerce. Yet Amazon emerged from the wreckage to lay waste to bricks ‘n’ mortar competitors that failed to recognize the online threat hadn’t disappeared. Investors who believed in digitization during the Dotcom Bubble weren’t wrong, they were just early. Robotics is another exciting industry set to change the future of humanity. It’s surely a question of “when” not “if”, though the route to commercial success is unlikely to be straightforward for today’s pathfinders. Investors in disruptive technology - by its very nature - need determination and patience in abundance if they’re to reap the rewards of their beliefs. Take blockchain ETFs. They had a terrible 2022 as the hype cycle deflated, but have since roared back with a tremendous 2023 and 2024. Thematic ETFs representing this megatrend include:

• Artificial intelligence ETFs
• Robotics ETFs
• Biotech ETFs
• Blockchain ETFs
• Innovations ETFs

At heart, this megatrend is about enabling 8 billion people to live sustainably on the planet, while ensuring that successive generations can enjoy a prosperous future. You’ll likely be familiar with the concept of Climate change ETFs that typically start with a standard investing index, then up eweight companies with strong green credentials and eliminate firms that don’t meet agreed sustainability criteria. Beyond that you can select ETFs that concentrate on a particular front of the battle - whether that be renewable energy, electric cars, safe water supplies, or sustainable food production. Looked at positively, the variety of ideas is a tribute to human ingenuity and a sign of hope in itself:

• Clean energy ETFs
• Battery technology ETFs
• Electric mobility ETFs
• Circular economy ETFs
• Future of food ETFs
• Clean water ETFs

It’s well known that global populations are aging due to declining birth rates and/or rising life expectancies. Naturally, this has major implications for society and business, especially those linked to pharmaceuticals, medical devices, senior living, retirement planning and other elder care services. As healthcare systems come under strain, companies that are targeting age-associated diseases such as Alzheimer's, cancer, and arthritis could be particularly well aligned with this megatrend. But the obverse view suggests worker shortages will increase in countries where birth rates are well below replacement levels and immigration is constrained. That implies leaning into robotics and automation stocks is a viable play.

• Ageing population ETFs
• Innovations ETFs - this category contains several products dedicated to advances in healthcare and genetic medicine.
• Robotics and automation ETFs

The World Bank predicts that urban populations are on course to more than double in size by 2050. Currently, around 56 % of humanity lives in urban areas, but that’s expected to reach 68 % by 2050 according to the United Nations. The UN estimates that almost 90 % of the growth will occur in Africa and Asia. Agglomeration effects also mean that the number of megacities (with populations over 10 million) is projected to expand from 44 in 2024 to 67 by 2050. The challenge, then, is to sustainably manage this extraordinary growth through infrastructure investments and smart city technologies. To investigate this megatrend: Search for Infrastructure in the ETF screener and look for keywords such as:

• Emerging Markets
• Smart city
• Sustainable cities or infrastructure

Also think about the digital innovations that facilitate and are made viable by urban clustering:

• Digital economy / Internet of Things
• Fintech ETFs
• Ecommerce ETFs
• Cloud Technology ETFs

This is the broadest megatrend from an investor’s perspective, as it arguably encompasses all the other shifts examined in this article. The social change category must also necessarily include positive socio-economic developments such as gender equality improvements and negative themes such as rising inequality. Wise investors accept the world as it is, though thankfully, there are more opportunities than ever to channel our investments towards the world we’d like to see.

• Social responsibility ETFs
• Gender equality ETFs
• Luxury goods ETFs
• Sharia-compliant ETFs

Megatrends may not give you the edge

While megatrends have a crucial impact on the world and ETFs are ideal for investing broadly and cost-effectively in global financial markets, some financial theorists are critical of the idea that you can successfully use such megatrend phenomena to boost your returns. Be aware that if you tilt your portfolio towards particular industries, then you may not be rewarded for the risk over the long run. Ultimately, there’s no guarantee themed ETFs will outperform a more diversified, passive investment strategy. You should, therefore, think through the following points of criticism before deciding to invest in megatrend ETFs:

• Some research shows that out-performing industries cannot be reliably identified in advance.
• Outsize profits are most likely to be earned when stocks are cheaply valued. However, some megatrend trades can be overhyped. Remember, the Dotcom Bust happened because investors bid up internet stocks prices before the technology was ready for the mass-market. Anyone brave enough to invest after the bubble burst achieved much better returns when digitization took off in the wake of the Great Recession.
• Beware believing that any technology or trend represents a one-way trip to success. Emerging industries are inherently volatile and their fortunes subject to regulatory changes, technological disruptions, and market sentiment.
• Ensure you research your megatrend ETF’s index before investing. Individual indexes often interpret their themes quite differently, with divergent results. Check the concentration risk of your ETF and whether the underlying holdings offer the megatrend exposure you’re looking for.

How to compare megatrend ETFs

You can very quickly compare megatrend ETFs by:

1. Clicking on the List of ETFs.
2. Scroll down to Thematic ETFs.
3. Choose a theme you're interested in.
4. Scroll past the charts to the comparison section. For example, AI ETFs in comparison.
5. Click on the Compare all Artificial Intelligence (AI) ETFs in detail orange text.
6. In the Overview tab - click Select all.
7. Go to the number in the top-right hand corner of the page and hit Compare selection in detail.
8. Now you can quickly compare key data on performance and diversification across every ETF in the selection.

You can do this for any theme in the List of ETFs, and it’ll massively speed up your research. Once you’ve shortlisted a few ETFs, click through to their individual profiles to inspect them in greater detail. Check out each provider’s official documentation and google any major holdings you’re unfamiliar with. It’s also a good idea to download the datasheet and methodology of your ETF’s index. You should be able to find this with a brief Internet search. If not, try a competitor.