Halfway through the year, thematic equity ETFs have exhibited wide levels of dispersion but continue to capture the market’s attention heading into the second half of 2024.
The world’s largest asset manager just released its midyear thematic outlook, which delineates what it deems the two biggest mega forces shaping the future of thematic investing – namely, AI and geopolitics – and offers thematic baskets to capitalize on such trends.
VettaFi also polled advisors at last week’s Midyear Market Outlook Symposium about their thematic equity ETF exposure. Nearly a third of respondents said they had allocated between 5% and 10% of client portfolios to the space. The majority said they had less than 5% exposure – leaving the door open for further growth.
Nuts and Bolts Behind AI
High hopes for massive infrastructure investment are paving the way for what could be an historic capital expenditure cycle. Roughly 80% of businesses are expected to use generative AI by 2026, up from less than 5% in 2023. Many, such as Nvidia chief Jensen Huang, are betting the shift to accelerated computing will kick off a wave of at least $1 trillion worth of investment.
With global AI chip revenue slated to surge 33% year-over-year to $71 billion, BlackRock recommends its cap-weighted iShares Semiconductor ETF (SOXX ), which charges 0.35% and has accrued $1.5 billion year-to-date. The firm also touted its iShares U.S. Digital Infrastructure and Real Estate ETF (IDGT ), which offers targeted access to U.S. companies tied to the storage, processing and transmission of digital data and services. Top holdings include Super Micro, American Tower and Digital Realty Trust.
The most popular pureplay semi ETF this year has been the VanEck Semiconductor ETF (SMH ) – nearly a quarter of which is Nvidia. SMH has enjoyed almost $5 billion in net inflows and 50% in total returns so far this year.
But advantages spread beyond the coveted GPUs used in large language models like ChatGPT. Software, semiconductor equipment companies, and data center operators are also poised to benefit from AI’s rapidly expanding footprint.
Jay Jacobs, U.S. Head of Thematics and Active Equity ETFs at BlackRock, underscored the explosive impact AI has had thus far.
“It is hard to overstate the importance of AI across the economy,” he said. “2024 is a step-change function for AI adoption as AI shifts from concept to commercialization, and companies ranging from health care to financials and beyond look to rapidly adopt this tech to improve efficiency or improve products and services.”
For more targeted bets on AI, advisors can also look to the large-cap growth offering Global X Artificial Intelligence & Technology ETF (AIQ ), which has seen just shy of $1 billion in net inflows year-to-date, or the ROBO Global Artificial Intelligence ETF (THNQ ), which looks for technical leaders in the AI and robotics space, including large-cap names like Cloudflare, Palo Alto Networks and Rapid7.
Copper Supply Crunch
Goldman Sachs estimates data centers will consume 8% of overall U.S. power demand by 2030, up from 3% in 2022. This comes amid a sea of rising electrification, EVs and a potential resurgence in domestic manufacturing, driven by reshoring.
But copper may prove to be a “chokepoint” for satisfying energy and digital infrastructure demand. Copper is already in short supply. Demand has grown steadily for more than a century. It may surge nearly 20% by 2030, in the wake of growing clean energy initiatives and data center expansion. That’s an increase of more than one million metric tons, according to global commodity giant Trafigura.
But global copper mine production is falling well short of what is needed to keep pace with demand. And it’s not just data centers. A typical EV requires three to five times more copper than gas-powered cars. Copper supplies much of its wiring, batteries and motors.
Additionally, copper prices tend to be highly correlated with emerging markets growth. This growth is another key theme to watch in the second half.
Copper bulls may want to consider the iShares Copper and Metals Mining ETF (ICOP ), Global X Copper Miners ETF (COPX ), Sprott Copper Miners ETF (COPP ) or even the SPDR S&P Metals & Mining ETF (XME ) for broad-based exposure to diversified metals.
Global Turmoil, Supply Chains and Shifting Demographics
This year, half the world’s population is holding elections. Therefore, technology is increasingly caught in the crosshairs of tariffs, export bans, and national security issues. A widening gap is forming between tech firms that are more exposed to these risks and those that aren’t. Such a gap can breed investment opportunities among domestic, self-sufficient companies. These companies are also poised to benefit more from government support than their more globally exposed peers.
To that end, they recommend the iShares U.S. Tech Independence Focused ETF (IETC ). IETC actively selects tech companies with a greater percentage of revenues and production coming from the United States. Microsoft, Amazon and Broadcom are among the fund’s top holdings.
Beyond technology, reshoring policies in the U.S. have sparked a revival in manufacturing. In the long run, bringing business back to U.S. shores could dramatically lower the risk of supply chain instability, shipping delays, poor product quality and trade tensions.
More targeted reshoring offerings include the actively managed Tema American Reshoring ETF (RSHO ) and TCW Transform Supply Chain ETF (SUPP ), formerly owned by Engine No. 1.
BlackRock also cited active large caps and emerging markets supply chains as key areas to watch. Trade policy and shifting global supply chains are breeding new opportunities in emerging markets – particularly in India and Mexico – both of which have growing working-age populations and friendlier trade relations.
Heading into the second half, strategic thematic ETFs remain some of the best ways to leverage trends like AI and global growth, which cut across multiple sub-industries and sectors.
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