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The birth of exchange-traded funds over the past several years has led to the birth of thematic stock investing, and that's a good thing. Specifically, ETFs - through diversification - allow investors to invest in themes, not stocks. This reduces the risks inherent in picking a single winner in an industry, while still giving investors exposure to the upside throughout the entire industry.
In other words, thematic investing through ETFs is a great way to simultaneously reduce risk and maintain solid upside exposure.
The key with ETFs, of course, is to pick the right ones. As opposed to picking the right stock, investors have to pick the right theme. This is easier to do than picking the right stock and the right theme. But, it still requires ample due diligence.
With that in mind, let's take a look six big growth ETFs investors should consider if they are looking to invest in tomorrow's most important themes.
First Trust Nasdaq Cybersecurity ETF (CIBR)
The Big Idea: The value of cybersecurity will only dramatically rise in an increasingly digitally connected world.
Key Holdings:Cisco (NASDAQ: CSCO ), Fortinet (NASDAQ: FTNT ), Palo Alto Networks (NYSE: PANW ), Splunk (NASDAQ: SPLK ) and Okta (NASDAQ: OKTA )
Thanks to the widespread proliferation of the internet and rise of things like AI, IoT and the cloud, the consumer and enterprise worlds are becoming more digitally connected than ever before. Ostensibly, this is a good thing. But, we've been reminded recently of the downfalls of this unprecedented connection through various hacks and data security breaches. Broadly speaking, everyone and every company's data is running around on the internet, and that presents huge risks for both the individual and the enterprise.
Cybersecurity solutions protect against these risks. Over time, as the world becomes more digitally connected, these risks will only grow. As they do, the value of protecting against these risks will grow, too. Consequently, the outlook for the whole cybersecurity space to rise dramatically in value over the next several years is favorable. That's why the First Trust Nasdaq Cybersecurity ETF (NASDAQ: CIBR ) looks like a solid long-term holding.
First Trust Cloud Computing ETF (SKY)
The Big Idea: Everything is going to cloud, and as it does, the companies that provide cloud-based services will grow tremendously.
Key Holdings: VMWare (NYSE: VMW ), Salesforce (NASDAQ: CRM ), Netflix (NASDAQ: NFLX ), Amazon (NASDAQ: AMZN ) and Microsoft (NASDAQ: MSFT )
Technology used to be delivered and stored on-premise. That is, you used to buy software at a store, bring it home or to the office, download it and use it on-site, with all the operations, data and workflow hosted on-site. Over the past several years, this process has changed thanks to the cloud. Now, there's no need to go to a store and buy anything. Services are delivered directly through and stored in the cloud, and this removes frictions related to on-premise delivery and storage.
This revolution is well underway. That's why the First Trust Cloud Computing ETF (NASDAQ: SKYY ), which focuses on companies that deliver cloud-based services, is up more than 100% over the past three years. But, only 20% of enterprise workloads have migrated to the cloud. At scale, that number will be closer to 100%. Thus, we are only one-fifth of the way through the cloud growth narrative, and that means SKYY still has lots of runway left to head even higher in the long run.
iShares Expanded Tech-Software Sector ETF (IGV)
The Big Idea: Software-as-a-Service (SaaS) stocks are winning investments, and this ETF gives you broad exposure to the world's best SaaS stocks.
Key Holdings: Microsoft, Salesforce, Adobe (NASDAQ: ADBE ), ServiceNow (NYSE: NOW ) and Autodesk (NASDAQ: ADSK )
SaaS stocks are winning stocks. Broadly speaking, these are high-growth companies with robust exposure to the cloud and software revolutions. They're also high-margin companies since costs associated with delivering cloud-hosted solutions at scale are relatively small. Further, they are often supported by steady and predictable revenue streams, which gives investors confidence regarding go-forward operational stability. Because of these winning attributes, the iShares Expanded Tech-Software Sector ETF (NYSE: IGV ) is up 115% over the past three years.
This big rally will continue. As stated earlier, only 20% of workloads have migrated to the cloud, so revenue growth potential remains huge. Plus, margins have lots of room to expand as the industry matures, and revenue predictability will likewise improve with scale. Overall, then, the three big tailwinds which have produced huge gains in IGV will persist for the foreseeable future, and that means that this big rally is far from over.
Global Robotics and Automation Index ETF (ROBO)
The Big Idea: The robots are coming, and companies that provide automation technology and services will profit tremendously in the long run.
Key Holdings: Nvidia (NASDAQ: NVDA ), Zebra (NASDAQ: ZBRA ), Intuitive Surgical (NASDAQ: ISRG ), Rockwell Automation (NYSE: ROK ) and iRobot (NASDAQ: IRBT )
One of the biggest trends over the next several years will be automation. Specifically, automated technologies will continue to get better and better, until they are good enough to largely replace human labor in many parts of the workforce. That's not great news for the labor market. But, it is great news for the companies that are leading this automation revolution, like Intuitive Surgical - the company that is putting robots in the surgery room - and iRobot - the company that is putting robots in your house to clean your floors.
All of these leading automation companies are packaged into the Global Robotics and Automation Index ETF (NYSE: ROBO ). As such, as the automation trends gain mainstream traction over the next decade, the ROBO ETF will explode higher alongside all the important automation stocks.
Amplify Online Retail ETF (IBUY)
The Big Idea: E-commerce is still in the early stages of a multi-year secular growth narrative, and e-commerce companies will continue to grow at a rapid rate for the foreseeable future.
Key Holdings: Amazon, Wayfair (NYSE: W ), Chegg (NYSE: CHGG ), Etsy (NASDAQ: ETSY ) and PayPal (NASDAQ: PYPL )
One of the biggest growth narratives over the past several years has been the rapid rise in e-commerce. Companies like Amazon, Wayfair and Etsy have pioneered of new of era shopping from the comfort of your own home, and in so doing, have stolen tremendous market share from traditional retailers. Consequently, all those stocks have soared, as has the Amplify Online Retail ETF (NASDAQ: IBUY ).
These gains will continue. At the present moment, e-commerce sales represent just over 10% of total retail sales in the U.S. That's still a relatively small piece of the pie. Further, the whole industry continues to grow at a healthy double-digit rate. Thus, it increasingly appears as though we are still in the early stage of e-commerce's long-term growth narrative. As that narrative plays out over the next several years, the IBUY ETF will continue to rise.
ETFMG Prime Mobile Payments ETF (IPAY)
The Big Idea: Digital payments, and specifically mobile payments, are gaining massive traction, and the companies behind these payments project as big growers.
Core Holdings: PayPal, Mastercard (NYSE: MA ), Visa (NYSE: V ), Square (NYSE: SQ ) and American Express (NYSE: AXP )
As digital shopping has grown, so has the digital payments world. When you shop online, you can't pay for an item with cash. You have to use a card or a digital payment account. Thus, cash has become less prevalent throughout the economy over the past several years, while digital payments have become more prevalent. This has led to huge gains in digital payment stocks like Master, Visa and Square, as well as in the Prime Mobile Payments ETF (NASDAQ: IPAY ).
As stated earlier, e-commerce sales only represent 10% of total retail sales, so that growth narrative is far from over. Consequently, the parallel digital payments growth narrative is likewise far from over. Specifically, within the digital payments world, we are going to see a huge rise in mobile commerce over the next several years as mobile-first apps like Instagram dive deeper into shopping. All of this implies big growth ahead for digital payments stocks and the IPAY ETF.
As of this writing, Luke Lango was long PANW, CIBR, CRM, NFLX, AMZN, ADBE, NOW, ROBO, CHGG, PYPL and SQ.
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