MW Is the heyday for thematic ETFs over? They could be a 'relic,' according to this analyst.
By Christine Idzelis
The number of new thematic funds surged in 2021. Now more are closing than launching, according to Strategas.
Hello! This week's ETF Wrap digs into the lack of investor appetite for thematic funds so far this year, even as many such funds are invested in popular tech stocks.
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Thematic exchange-traded funds may already have seen their heyday, with smaller ETFs in particular at risk of closing, according to Strategas.
"There's simply too much product, chasing too few available dollars," said Todd Sohn, ETF strategist at Strategas, in a note this week. "A large chunk of the thematic space may now be a relic of the QE era where high beta growth companies thrived and found their way into many baskets."
Thematic ETFs saw a burst of launches in 2021 that peaked that year as the market was benefiting from the Federal Reserve's low-interest rate policy and its quantitative easing program known as QE, according to Strategas. But more thematic funds have closed than launched in the past two years, against the backdrop of starkly different monetary policy marked by elevated rates and quantitative tightening as the Fed aims to bring inflation down.
Meanwhile, the actively managed ARK Innovation ETF ARKK, a high-profile fund targeting disruptive innovation as an investment theme, has seen $1.9 billion of outflows so far this year, according to FactSet data as of June 26. That includes $160 million that investors in the past week pulled from the ETF, which has around $6 billion of assets under management, according to FactSet data.
Actively managed funds are typically more expensive than passive index ETFs, as their portfolio managers aim to deliver market-beating gains. The ARK Innovation ETF has an expense ratio of 0.75%.
Shares of the ARK Innovation ETF are down around 16% this year through Thursday, in contrast to big gains posted by the S&P 500 and tech-heavy Nasdaq Composite in the first half of 2024, according to FactSet data .
ARK says on its website that it defines disruptive innovation "as the introduction of a technologically enabled new product or service that potentially changes the way the world works."
Read: S&P 500 gain in first half of 2024 blows historical average 'out of the water'
Shares of the Invesco QQQ Trust Series I QQQ, which tracks the Nasdaq-100 index, have soared 17.6% this year through Thursday. The fund has seen $13.7 billion of inflows this year as of June 26, FactSet data show. Meanwhile, the SPDR S&P 500 ETF Trust SPY has climbed around 15% so far in the first half of 2024.
Investors have plenty of ETF options around the theme of innovation and disruption, according to Sohn. His note cited the SPDR S&P Kensho New Economies Composite ETF KOMP, Invesco Nasdaq Next Gen 100 ETF QQQJ, iShares U.S. Tech Breakthrough Multisector ETF TECB, Goldman Sachs Innovate Equity ETF GINN, Goldman Sachs Future Tech Leaders Equity ETFGTEK, Main Thematic Innovation ETF TMAT and ALPS Disruptive Technologies ETF DTEC as examples, along with many smaller ETFs with less than $100 million of assets.
"All these launched because of the original success" of the ARK Innovation ETF, Sohn said in a phone interview. "You started to see copy cats come out left and right," even if there are some differences in how they're managed, he said. "There's a lot of similarity" across other ETF themes, like cybersecurity, electric vehicles and genomic funds, Sohn added.
Supply and demand 'problem'
Sohn's research turned up 186 small thematic ETFs with less than $50 million of assets under management. That bracket ranks by far the largest in terms of number of ETFs, with the next biggest bucket, at 38 funds, ranging from $50 million to $100 million in assets, he found.
His note shows the sole category of thematic ETFs with collective inflows over the past year was the one with assets ranging from $1.6 billion to $3.2 billion. All told, Sohn tallied more than 300 ETFs chasing just $120 billion of assets in the "thematic space," saying overall that has left them with a supply and demand "problem."
So far this year, thematic ETFs have seen a total $1.7 billion of outflows through June 25, Sohn said by phone, citing data from ETF Action.
Managers of small funds with, say, $10 million of assets under management, may struggle to make money from a business perspective due to operating costs of the fund, he said in the phone interview.
For investors, selecting the right theme plus getting both the entry and exit timing correct is "extremely challenging," presenting yet another "hurdle" for thematic ETFs, according to Sohn's note.
The bulk of assets in actively managed thematic ETFs are linked to technology-dominant portfolios, he wrote. But the broad U.S. market is already saturated with tech, with the SPDR S&P 500 ETF Trust SPY having more than 30% exposure to the sector, he said in the note.
Meanwhile companies like Nvidia, Broadcom Inc. $(AVGO)$, Facebook parent Meta Platforms Inc. (META), Amazon.com Inc. $(AMZN)$ and Advanced Micro Devices Inc. $(AMD)$ show up across ETFs targeting the momentum-factor, "hedge fund VIP" and "thematic all-stars," according to his research. Sohn found those stocks were common holdings among the iShares MSCI USA Momentum Factor ETF MTUM , Amplify Thematic All-Stars ETF MVPS and Goldman Sachs Hedge Industry VIP ETF GVIP.
Considering Nvidia's massive surge in 2024 and heavy weight in the S&P 500 and Nasdaq-100 indexes, investors should monitor how much exposure they have to the artificial-intelligence chip maker across their ETFs, according to Sohn.
While Nvidia's massive gains in 2024 have gotten a lot of attention amid the recent AI frenzy, the GraniteShares Nasdaq Select Disruptors ETF DRUP is among funds with double-digit gains this year that don't currently hold the chip maker.
The ETF, which has $58 million of assets under management, is up 16.2% this year through Thursday, according to FactSet data. Its top holdings as of June 26 included Microsoft Corp. $(MSFT)$, Meta, Google parent Alphabet Inc., Adobe Inc. $(ADBE)$ and Salesforce.com Inc. $(CRM)$, according to data from GraniteShares's website. The GraniteShares Nasdaq Select Disruptors ETF charges a 0.6% fee annually.
Read: How GMO's ETF is beating the S&P 500 this year - without Nvidia
The Capital Group Growth ETF CGGR, which also is actively managed but does include Nvidia in its top 10 holdings as of June 26, has climbed 17.4% this year through Thursday, according to FactSet data.
"It's very challenging to pick the right theme at the right time," said Scott Davis, head of ETFs at Capital Group, in a phone interview. But the Capital Group Growth ETF invests broadly in a diversity of long-term trends, looking for growth beyond just technology, he said, adding that the fund mainly focuses on U.S. stocks.
As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.
The good...
Top performers %Performance AdvisorShares Pure US Cannabis ETF 7.6 YieldMax TSLA Option Income Strategy ETF 3.8 abrdn Physical Platinum Shares ETF 3.0 First Trust NYSE Arca Biotechnology Index Fund 2.9 SPDR S&P Biotech ETF 2.6 Source: FactSet data through Wednesday, June 26. Start date June 20. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater.
...and the bad
Bottom performers %Performance YieldMax COIN Option Income Strategy ETF -7.2 ProShares Bitcoin Strategy ETF -6.3 Bitwise Bitcoin ETF Trust -6.3 ARK 21Shares Bitcoin ETF -6.3 iShares Bitcoin Trust -6.3 Source: FactSet
New ETFs
Capital Group said Thursday that it launched seven new actively managed ETFs, including Capital Group Global Equity ETF (CGGE), Capital Group New Geography Equity ETF (CGNG), Capital Group Conservative Equity ETF (CGCV), Capital Group International Core Equity ETF (CGIC), Capital Group Ultra Short Income ETF (CGUI), Capital Group International Bond ETF (USD-Hedged) $(CGIB)$ and Capital Group Municipal High-Income Bond ETF $(CGHM)$.
Goldman Sachs announced on Thursday "the first fund launched in Europe through Goldman Sachs ETF Accelerator," the AI-Enhanced Eurozone Equities UCITS ETF.
Weekly ETF reads
Why VanEck's solana ETF application is a win for crypto - even if it's not approved (MarketWatch)Communication-services ETF scores record finish (MarketWatch)US regulators could approve spot ether ETFs for launch by July 4, sources say (Reuters)ETF debuts surge as actively managed offerings gain traction (Financial Times)A $54 Billion Long-Bond ETF Sees Record Haul as Traders 'Fight the Fed' (Bloomberg)
-Christine Idzelis
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June 27, 2024 18:31 ET (22:31 GMT)
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