Disruptive Theme of the Week: 2024's Top Investment Themes & Trends

Here is a recap of some of the top thematic investment stories and milestones for 2024!

Although it seems like ancient history now, 2024 saw the milestone approval of crypto ETFs in the U.S., with the launch of bitcoin ETFs in January of 2024 and ethereum ETFs in May. Less than a year in, bitcoin and bitcoin-focused ETFs hold $119.4 billion, while ethereum and ethereum-related ETFs have combined assets of $9 billion. Ethereum flows are certainly impressive but pale in comparison to those of bitcoin.

In addition, the tactical blend category that includes ETFs holding both bitcoin and ethereum or blending crypto with other asset class such as Treasuries or gold or options represents more than $200 million in assets.  And there are likely to be more crypto approvals and asset combinations in the coming year.

Whereas Defense themes in general experienced strong performance in 2024, defense technology specifically was a particularly important investment theme that emerged in response to rising geopolitical tensions around the world. The year marked a record for global defense spending, with the total hitting $2.4 trillion. Spending was also driven by the need for defense equipment modernization and defense technology innovation in areas like cyber defense, drones, robotics, and artificial intelligence.

The Global X Defense Tech ETF (SHLD B-) was the category leader in terms of performance, up almost 37% YTD. Its top holding is AI defense solution provider, Palantir.

Automation, AI, and reshoring were also top investment themes in 2024. They have risen in importance with a Trump 2.0 administration incoming. Between a crackdown on immigration and the prospect of tariffs, if manufacturing is going to be shifted domestically, automation utilizing tools such as robotics and AI will be needed to support these efforts and keep costs down.

ETFs that benefitted from these themes this year include the Tema American Reshoring ETF (RSHO B-), which has grown to $150 million in assets and has posted YTD returns of more than 25%. The ETF is an active fund that invests in companies exposed to the American reshoring trend.

Another play on these investment themes is the Franklin Intelligent Machines ETF (IQM C+), which is also actively managed and invests in innovative companies that automate or enhance everyday tasks. The ETF has a YTD return of more than 34%. Another active ETF leveraging a similar theme is the ARK Autonomous Technology and Robotics ETF (ARKQ B-), which is up more than 33% YTD.

On the artificial intelligence side, there are many AI ETFs, but most failed to deliver outsized returns relative to the market this year.  A few ETFs that did deliver strong performance and inflows were focused specifically on the opportunities associated with generative AI (e.g., Chat GPT). They include the Roundhill Gen AI and Tech ETF (CHAT B-), up more than 34% YTD, and the Themes Generative Artificial Intelligence ETF (WISE ), up 31.5% this year.

Broader ETF plays on the AI and Robotics themes include the Global X Artificial Intelligence and Technology ETF (AIQ B-), the ROBO Global Artificial Intelligence ETF (THNQ C+), and the ROBO Global Robotics and Automation Fund (ROBO B-).

All of this raises the question of how we can best power these technologies.

Everyone likes a good comeback story, and nuclear fits the bill. After spending years in decline, nuclear power has been resurrected as a clean source of power to support the rising energy needs of data centers and applications such as artificial intelligence, quantum computing, reshoring, and crypto mining. Besides nuclear power plays, blended exposure including uranium has been a beneficiary of this trend.

Here are ETFs that currently provide exposure to this emerging theme:

The category winner in nuclear ETFs this year was the aptly tickered Range Nuclear Renaissance Index ETF (NUKZ C+), which offers exposure to new categories in nuclear such as small modular reactors (SMRs). The Themes Uranium Nuclear ETF (URAN) launched in the latter half of the year but looks like a potentially formidable competitor to NUKZ based on its backtested index performance.

Another top thematic category this year was energy infrastructure. This theme also aligns with the spike in energy demand associated with power-intensive technology applications like electric vehicles, AI, machine learning, automation, and crypto mining. These all tax our grid infrastructure and help drive the need for data center expansions.

Boston Consulting Group estimates data center share of U.S. electricity consumption could more than triple by 2030. An additional catalyst for increased power demand is the resurgence of domestic manufacturing and reshoring.

Despite targeted spending in this area from the Inflation Reduction Act of 2022 in categories such as EV charging infrastructure and battery storage, energy infrastructure remains behind the curve relative to demand. U.S. grid infrastructure is quite antiquated. Much of it dates back to the 1960s and 1970s, making it vulnerable to power outages, cyber-attacks, and extreme weather events. Europe’s electricity grid is also among the oldest in the world, with its different components averaging 40 years old. Its age threatens to derail the region’s clean energy goals.

There are several ETFs that provide exposure to the companies that will benefit from smart grid and electric infrastructure spending. The First Trust NASDAQ Clean Edge Smart Grid Infrastructure ETF (GRID B-) has the most direct exposure to this theme.  The ETF has grown to over $2 billion in assets this year and delivered YTD performance of 20%.

Another ETF leveraged to this theme is the Alerian Energy Infrastructure ETF (ENFR ) which is concentrated in midstream energy operations, holding the top 30 names engaged in the transportation, storage, and processing of energy. The ETF holds more than $230 million in assets. It’s up more than 43.5% YTD, while also paying an attractive yield of over 4%.

Although investors might be focused on cleaner and “techier” ways to power data centers, like small nuclear reactors, midstream energy — the middle stage of the oil and gas industry, where raw materials are processed and transported — is a reasonably clean and much cheaper near-term alternative solution.  Other ETFs with similar exposure include the Pacer American Energy Independence ETF (USAI ) and the USCF Midstream Energy Income Fund (UMI A-).

GLP-1 weight loss drugs continued to be a transformative theme in 2024. The year has featured new formulations of drugs specifically targeting weight loss, such as Novo Nordisk’s Wegovy and Eli Lilly’s Zepbound. There is also the promise of the next generation of drugs from other pharma companies, a group that includes oral pills, more convenient dosing, and expanded indications. Both the existing and the developing treatments are likely to continue to to drive growth.

While high pricing in the absence of insurance reimbursement and shortages have created compound pharmacy competition, the long-term outlook for this theme remains positive. Goldman Sachs projects the obesity-drug market will grow to $130 billion by 2030.

There are currently three ETFs with explicit exposure to this theme, with two launching in May of 2024. They include the actively managed Tema GLP-1 Obesity & Cardiometabolic ETF (HRTS ) and the Roundhill GLP1 and Weight Loss ETF (OZEM ), as well as the passively managed Amplify Weight Loss Drug & Treatment ETF (THNR ).

Strong thematic performance has driven increased investor interest in related ETFs in 2024. It has also spurred more interest and greater creativity among ETF issuers, which is a good thing for investors as well.  Some of the thematic trends we saw in 2024 include the following:

Concentrated Pure-Play Exposure: Highly concentrated pure-play thematics, sometimes using swaps to get around diversification rules, became a trend in 2024. The Roundhill Magnificent Seven ETF (MAGS B+), which actually launched in 2023 but came into its own this year, is a successful example using this structure, providing exposure to the Magnificent 7 stocks via swap agreements. It has $1.46 billion in assets.

More Leverage: If a 1X version of a theme is good, why not go 2X long or short?  More use of leverage in thematics was another trend in 2024. This year’s top-performing levered ETF was the ProShares Ultra Semiconductors (USD B+), which offers 2X exposure to the Dow Jones U.S. Semiconductor Index and is up 134% YTD. The leverage trend also extended to single-stock ETF plays. The GraniteShares 2X Long NVDA ETF (NVDL ), for example, has gathered $5.56 billion in assets with its more than 370% YTD return.

Options Overlay: Another thematic investment trend in 2024 was implementing options strategies with thematics to generate income. Income is a way to keep investors happy in long-term themes even when they are out of favor in the short-term. As an example, YieldMax offers a high yield take on the ARK Innovation ETF (ARKK B): the YieldMax Innovation Option Income Strategy ETF (OARK B-) delivered a a 12-month distribution yield of 40.8% and returned 13%, compared to ARKK’s 16.3% YTD return.

Active Themes: Active thematic investment is not a new thing, but it has become more prevalent, as actively managed ETFs have gained market share. There are now 60 active ETFs among the 152 ETFs categorized by Bloomberg as Thematic Equity.

Is it better to be active or passive in a theme? Passive thematic ETFs generally are lower cost and often have less risk because they are more diversified. Active thematic ETFs have the potential for higher returns, but come with higher fees and more risk, depending on how actively the ETF is being managed. The good news, beyond the active vs. passive debate, is that investors now have a lot more active thematic choices to consider.

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