Thematic ETFs Fall Out of Favor as Investors Flock to Broad Market Indexes
Investors are abandoning thematic exchange-traded funds (ETFs) in droves, opting instead for funds tied to broad stock market benchmarks that have been hitting record highs. This trend is expected to continue unless the broader market stumbles.
A Challenging Environment for Thematic ETFs
Thematic ETFs, which invest in companies linked to specific themes such as artificial intelligence, solar energy, and millennial consumers, have been struggling to retain assets. According to Morningstar, the category has lost $5.8 billion in investor capital this year, exceeding the $4.8 billion in outflows for all of 2023.
Returns from Broad Market Indexes Set a High Bar
The S&P 500, a benchmark for the US stock market, has climbed over 22% this year, driven by gains from influential stocks like Nvidia and Meta Platforms. The five-largest ETFs tracking the S&P 500 and the Nasdaq 100 have seen inflows of $170 billion this year, with the SPDR S&P 500 ETF Trust becoming the first ETF to reach $600 billion in assets.
Timing is Everything
Part of the challenge facing thematic ETFs is the nature of thematic investing itself. Investors often mistime their investments, missing out on returns. A Morningstar study found that investors in thematic ETFs missed out on two-thirds of their returns over a five-year period.
Even AI-Themed ETFs Struggle
Some AI-themed ETFs with significant exposure to Nvidia have struggled to retain assets. The Global X Robotics & Artificial Intelligence ETF has seen net outflows of $89 million in the last 12 months, despite having nearly 13% of its portfolio in the AI chipmaker.
Fees Diminish Appeal
Thematic ETFs tend to levy higher fees, averaging 0.62% of money invested, compared to the average ETF fee of 0.49%. This can diminish their appeal to investors.
Launches and Closures
The number of thematic launches has dropped significantly, from 39 in 2023 to 13 this year. Closures of thematic funds have already topped last year’s total, with 36 compared to 32.
A Contrarian View
Themes ETFs is bucking the trend, having launched 18 products since December, including a Transatlantic Defense ETF and a European Luxury ETF. The firm’s investment strategist, Taylor Krystkowiak, believes that when S&P 500 megacaps stop delivering, the focus will shift back to thematic ETFs.
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