Manufactured Demand
One of the newer developments within finance is the increasing tendency for financial products to be marketed not in response to existing demand, but rather for the purpose of creating demand itself. While economics is often presented as a discipline in which producers respond to the desires and preferences of consumers, reality frequently reveals a more complex relationship. Demand is not always discovered; it can also be manufactured.
This phenomenon is particularly visible within the exchange-traded fund industry, where the creation of new products increasingly appears driven less by the investment needs of consumers and more by the marketing opportunities available to fund issuers.
The traditional purpose of an investment product is relatively straightforward. A firm identifies a financial need among investors and develops a product designed to satisfy that need. An investor may seek broad market exposure, income generation, international diversification, or protection against inflation. The financial product is therefore constructed as a response to an already existing demand.
Yet much of the modern ETF landscape appears to operate according to the reverse principle.
Rather than fulfilling demand, many products are designed first, marketed aggressively second, and only then presented to investors as though they solve a problem which previously required solving. The objective is no longer merely to satisfy consumer demand, but to stimulate it.
This process becomes particularly evident in the rise of thematic investing.
Every few years a new theme emerges. Artificial intelligence, clean energy, blockchain technology, cybersecurity, autonomous vehicles, genomics, the metaverse, space exploration, robotics, quantum computing, and countless others have each, at various points, become the centrepiece of newly launched investment funds. The theme itself becomes the product.
The investor is no longer purchasing ownership in productive enterprises primarily because of their profitability, valuation, or business fundamentals. Instead, the investor is purchasing participation in a narrative.
This distinction is important because narratives are often easier to market than fundamentals. A portfolio consisting of profitable businesses trading at attractive valuations may be economically sound, but it lacks the emotional appeal of a fund promising exposure to “the future.” Thematic investing, therefore, transforms investing from an exercise in ownership into an exercise in speculation upon a story.
However, for the fund issuer, this presents an obvious advantage. The more compelling the narrative, the greater the inflow of assets. The greater the inflow of assets, the larger the management fees collected by the issuer. Whether the underlying theme ultimately succeeds becomes secondary to the immediate profitability generated by gathering assets under management.
Further, one of the peculiar characteristics of thematic investing is that many thematic funds are launched only after the underlying narrative has already captured public attention. Capital tends not to flow into these funds before enthusiasm exists; rather, the enthusiasm itself becomes the justification for the product’s creation. The fund issuer recognizes public excitement, packages that excitement into an investable product, and then profits from the fees generated by investors seeking exposure to the trend.
The result is a system in which financial firms increasingly compete not by discovering superior investments, but by discovering superior marketing narratives.
This reveals a broader truth about economics itself, as demand is not always an independent force originating from consumers. It can also be cultivated, encouraged, and manufactured by producers seeking profit. The consumer often believes himself to be pursuing a desire of his own creation, when in reality that desire has been carefully shaped through advertising, branding, and narrative construction.
Financial markets are not exempt from this principle, just as consumer goods companies market products to stimulate purchases, financial institutions market investment products to stimulate capital inflows. The difference is merely the object being sold. In one case, it is a physical good. In the other, it is a financial narrative.
The consequence is an ever-expanding universe of increasingly specialized products competing for investor attention. Rather than asking what investments investors genuinely require, the industry increasingly asks what themes can be packaged most effectively into a saleable product.
This tendency reveals an excess within modern finance. The purpose of capital markets is ostensibly the efficient allocation of capital toward productive enterprise. Yet large portions of the industry appear increasingly devoted to the creation of products whose primary purpose is not necessarily economic efficiency, but fee generation.
The financial product becomes less a solution and more a sales vehicle, and in this sense, thematic investing provides a useful lesson extending far beyond finance itself. It demonstrates that markets are not always governed solely by consumer preferences but are also influenced by the incentive to generate demand when profitable.