As we face the last quarter of 2024, interest rates are finally heading down, kicked off by a 50 basis point Fed cut, the election race is too close to call, and global geopolitical instability remains a risk factor. Amid this market environment, what have been some of the top investment themes for the year? Last year was all about Bitcoin and AI. This year, the opportunity set has been more diverse.
Defense & Security
As global conflicts rage in Russia, Ukraine, and the Middle East, it is no surprise that defense has emerged as a top investment theme this year. Global defense spending rose to a record $2.2 trillion in 2023. The post-Cold War “peace dividend” era has come to an end in favor of ramping up defensive capabilities and modernizing equipment and technology. Defense companies are seeing record order backlogs, which translate into stellar performance for the year.
Among the performance leaders are the Global X Defense Tech ETF (SHLD ), up almost 33% for the year, followed by the First Trust Indxx Aerospace and Defense ETF (MISL ), up 24.5%, and the Invesco Aerospace & Defense ETF (PPA ), up 24%. VettaFi’s Roxanna Islam wrote a detailed piece on the opportunities in defense.
In addition to traditional defense, security-related themes have also prospered this year. The Procure Disaster Recovery ETF (FIXT ) and the Pacer Biothreat ETF (VIRS ) are two such examples, up 25% and 23.5% each. Neither has gained much in the way of asset flows, however. Despite their strong performance, these ETFs have between $3 million and $4 million in assets.
Digital Infrastructure & Data Centers
What is the best way to gain exposure to the AI Revolution? The dispersion of returns among AI-themed ETFs is almost as large as the opportunity itself. However, one AI-related investment theme being rewarded this year is the digital infrastructure and data centers supporting AI technology.
Among the performance leaders in this category is the AXS Esoterica NEXTG Economy ETF (WUGI ), an actively managed ETF focused on the enablers behind the digital infrastructure economy. The fund has only $30 million in assets but has chalked up an impressive return of 32.7% YTD. Another passively managed competitor in this category is the Pacer Data & Digital Revolution ETF (TRFK ), up 26% YTD. Also worth an honorable mention is the Global X Data Center & Digital Infrastructure ETF (DTCR ), up a little over 17% YTD.
Rising Data Center Energy Demands
A major concern related to this theme is the rising energy demands associated with data centers. Most experts agree that this very energy-intensive technology will require innovative solutions. The Electric Power Research Institute projects that within six years, centers could use as much as 9% of the U.S.’s generated electricity. But despite rising demand, many capital-intensive themes, like clean energy, have languished in a rising rate environment.
One ETF approach that is performing well despite clean energy headwinds is the TCW Transform Systems ETF (NETZ ). The actively managed fund invests in companies it determines are likely to reap the benefits of the global transition to clean energy and the net zero emissions goal. NETZ is up 29% YTD and holds a diversified basket of stocks ranging from GE Aerospace to waste management firm Republic Services. The First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index (GRID ) is another ETF benefiting from the rising energy demands of electric infrastructure. It has now gathered more than $1.8 billion in assets and has a YTD return of more than 20.6%.
Blockchain as a Service
Another investment category aligned with the data center and digital infrastructure theme is blockchain. Blockchain as a service (BaaS) and the cloud are transforming data centers by improving scalability, enhancing security, ensuring data integrity, and providing cost efficiencies. The first and largest Blockchain ETF, the actively managed Amplify Transformational Data Sharing ETF (BLOK ) with $680 million in assets under management, is up more than 22% YTD. Also actively managed in the category with similar returns this year is the ARK 21Shares Blockchain and Digital Economy Innovation ETF (ARKD ). It only has $3 million, which is small in size by ARK fund standards. But both of these funds also dabble in crypto ETF exposure as well, which has helped boost YTD returns.
Digital Consumer
The digital consumer is increasingly armed with an array of options and improving infrastructure. Clearly, this has been the year of digital – as opposed to physical – retail.
In the month of August, total retail sales were up 2% year over year, but nonstore retailers were up 7.8%. Cost-conscious consumers are shopping online, preferring the selection and convenience of the online retail experience. Indeed, Amazon Prime Day was such a hit in July that they are doing it again in October. Meanwhile, physical retailers like Big Lots and Joann Fabric and Crafts, without a viable digital strategy, are filing for bankruptcy protection.
There are multiple ETFs associated with this theme. The first and largest online retail ETF remains the Amplify Online Retail ETF (IBUY ), which includes both online and omnichannel (hybrid) retail. Its equal weighting structure skews it toward smaller and mid-cap names, which could benefit it in a downward-rate environment. The ETF is up 9.7% YTD with $165 million in assets. The ProShares Online Retail ETF (ONLN ) returned twice as much YTD, up 18% with $88 million in assets. Its market cap weighted approach, giving Amazon a 25% weighting, has helped this year, but overall it provides a less diversified approach.
Rising Opportunity of Digital in India
Finally, a geographic play based on some powerful thematic trends performing well this year is India. The VanEck Digital India ETF (DGIN ) is up 27% YTD and offers exposure to the rise of digital consumption in India among its growing workforce population. The EMQQ India Internet ETF (INQQ ) also posted competitive returns leveraging this theme, 24.4% YTD. DGIN has $29 million in assets and a 0.76% expense ratio, while INQQ has $49 million in assets and an expense ratio of 0.86%.
Will India become the new China? Given its demographic dividend – the growth of its economy due to the structure of the country’s population – India may indeed claim the crown. China’s growth continues to be hindered by the long-term demographic effects of the one-child law. On a shorter-term basis, India has certainly outperformed China this year, with the iShares MSCI India ETF (INDA ) up more than 20% for the year, versus the iShares MSCI China ETF (MCHI ), up a modest 5.2%. Under the leadership of Prime Minister Modi, India has been transformed from an agrarian into a digital economy.
VettaFi LLC (“VettaFi”) is the index provider for FIXT, BLOK, and IBUY, for which it receives an index licensing fee. However, FIXT, BLOK, and IBUY are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of FIXT, BLOK, and IBUY.
