Thematic ETFs have had a tough slog – now headed for a third-straight year of losses. Roughly 90 thematic ETFs debuted back in 2021, compared to fewer than 20 this year. Many of the red-hot trades that sizzled in early 2021 fizzled out, with the exception of crypto. a record $140 billion in inflows in 2021, thematic ETFs bled almost half of all assets in 2022 (when the broader market tanked). The outflows have continued, to the tune of nearly $5 billion last year and roughly $6 billion this year.
How does 2021 compare to today? Three years ago, markets were bouncing back from a global pandemic. Investors were stuck working from home with nothing to do, and Wall Street was all abuzz about ESG, crypto, cannabis, and meme stocks. Extreme volatility and uncertainty around the markets meant more digging around for alpha opportunities, and in turn, thematic ETFs.
But market timing challenges and high fees have sparked a reversal of fortune for these funds. Not to mention, the dominance of the mega-cap growth trade and the Magnificent Seven has made it relatively easy for investors to simply sit back and let the market do much of the work for them – riding the mega-cap fueled rally. By extension, it’s been difficult for any single niche theme to outshine the broader equity space. But a few key bright spots have managed to buck the trend and offer thematic investors a glimmer of hope.
Infrastructure: Trending Now (and Forever?)
Recent legislation has reignited interest in infrastructure investing, as government spending has ramped up under the Biden administration. More than $450 billion has been spent on road, bridge and railway improvements over the past several years – with billions more in federal grants, incentives, tax credits and loans still set to spread throughout the economy. But the country’s aging infrastructure has become a bipartisan issue – one that will remain a priority no matter who sits in the Oval Office.
Time and time again, Global X has proven a dominant force in the thematic investing space. The $9 billion Global X U.S. Infrastructure Development ETF (PAVE ) is up more than 30% on a NAV basis, pulling in $1.6 billion in net inflows year-to-date. The fund – which offers diversified exposure to a broad array of industrials, construction companies and raw materials producers – has brought in nearly $400 million since election day. PAVE has been a top performer among its peers throughout most of its seven-year history. Trane Technologies, Parker-Hannifin and United Rentals are among its top holdings.
The next two most popular infrastructure plays have been the iShares U.S. Infrastructure ETF (IFRA ), which provides equal-weighted access to domestic owners and operators across materials, energy and utilities, and the iShares Global Infrastructure ETF (IGF ), which takes a targeted approach to global infrastructure.
The AI Craze
At the start of the year, many believed the hype around generative AI would spark a wave of thematic interest in the data analytics ecosystem. But so far, the flows have shown investors are more interested in passive AI exposure through the mega caps and continue to fixate on corporate earnings from the likes of Meta and Nvidia.
Even so, funds like the $2.4 billion Global X Artificial Intelligence & Technology ETF (AIQ ) have benefited from a focus on the positive micro picture. AIQ has risen 24% and accrued $1.2 billion in net inflows – almost half of the fund’s total assets under management. ServiceNow, Tesla, Meta, Netflix and Nvidia are among the fund’s 85 holdings.
As the “Mag 7” trade starts to tire out, though, investors will likely turn to more nuanced channels and entry points through which to capitalize on the rapid rise and adoption of AI, such as the ROBO Global Artificial Intelligence ETF (THNQ ) or the KraneShares Artificial Intelligence & Technology ETF (AGIX ). The former takes an even more targeted approach to AI technology and infrastructure, up 23% on a total return basis. The latter just launched in July and actively invests in global companies across the AI value chain.
Going Nuclear
Finally, soaring interest in AI has also sparked a renaissance in nuclear energy ETFs. Tech titans turn to alternative energy sources to meet data center power demand. Global demand remains on pace to outstrip supply, especially amid recent uranium trade restrictions. The Global X Uranium ETF (URA ) has seen roughly $900 million in new money this year – roughly a quarter of the fund’s total assets. The $3.5 billion fund, which counts Cameco and NexGen Energy among its top holdings, has risen 16% on a total return basis.
Two relatively newer entrants benefiting from the trend have been the Sprott Junior Uranium Miners ETF (URNJ ), which offers pureplay exposure to small uranium miners, and the Range Nuclear Renaissance Index ETF (NUKZ ), which just launched this year and has already reached $98 million in total assets. Both funds have seen positive net inflows in 2024.
Thematic ETFs Turnaround on the Horizon?
With the market constantly making new highs, and the bull run set to simmer down at some point, the thematic slump may well reverse next year The search for alpha may be back on. As mega-cap concentration risks, which are already historically high, continue to rise, many analysts forecast underperformance in the coming decade. If that happens, we’ll be keeping a close eye on how advisors and investors choose to diversify beyond the usual suspects and redeploy assets elsewhere.
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VettaFi LLC (“VettaFi”) is the index provider for THNQ, for which it receives an index licensing fee. However, THNQ is/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 THNQ.
