By Suzanne McGee
(Reuters) – Investors are abandoning exchange-traded funds tied to specific themes such as artificial intelligence and video games, flocking to funds tied to broad stock market benchmarks that are hitting record highs.
However, the run-up to the exit could slow if the broader market stumbles.
While flows into stock ETFs generally continue to rise, thematic ETFs, which invest in companies related to everything from solar energy to robotics and millennial consumers, are on track for their third straight year of net outflows, according to financial data and analytics company Morningstar. .
The category, with total assets of $108 billion, has lost $5.8 billion in investor capital this year, a larger outflow than the $4.8 billion for all of 2023, according to Morningstar.
“It’s winter for thematic ETFs right now,” says Taylor Krystkowiak, investment strategist at Themes ETFs, an asset management firm focused on the category.
Broad market index returns are raising the bar for thematic funds this year. The S&P 500, the benchmark for the U.S. stock market, is up more than 22% this year, driven by gains from influential stocks including Nvidia and Meta Platforms.
The five largest ETFs, which track the S&P 500 and the Nasdaq 100, another stock benchmark, have seen inflows of $170 billion this year. The SPDR S&P 500 ETF Trust on Thursday became the first ETF to reach $600 billion in assets.
“It’s not that people no longer like the idea of themes, but that a bull market dominated by a handful of mega-caps makes it difficult for any theme to stand out,” said Aniket Ullal, ETF analyst at CFRA , a market researcher. research agency.
BAD TIMING
Part of the challenge, says Bryan Armour, ETF analyst at Morningstar, is the nature of thematic investing itself.
Investors often make the wrong choice when investing in themes, according to a Morningstar study that found that investors in thematic ETFs lost two-thirds of their returns over a five-year period.
“You have to pick the right theme, then be sure the fund has picked the stocks that will benefit most from that theme, and then be right about when you buy the fund,” Armor said. “It’s hard to get that trifecta right.”
Even some AI-themed ETFs with excessive exposure to the popular Nvidia are struggling to hold assets. According to the company, the Global X Robotics & Artificial Intelligence ETF has seen net outflows of $89 million over the past twelve months. Despite having almost 13% of its portfolio in the AI chipmaker – almost double the weighting in the S&P 500 – it has only performed in line with the index, with both up around 39% in the past year.
“We remain convinced of longer-term themes,” said Arelis Agosto, head of thematics at Global “We look at the long term.”
Cathie Wood’s ARK Innovation ETF, which invests in companies promising “disruptive innovation,” has seen outflows of $2.6 billion in 2024, the most among thematic ETFs, according to Morningstar. The fund is down more than 9% this year.
The fact that thematic funds typically charge higher fees may reduce their appeal. Thematic ETF fees average 0.62% of the money invested, while the average ETF fee is 0.49%. According to Morningstar, investors pay 0.09% to own the State Street S&P 500 ETF and 0.03% for BlackRock’s iShares Core S&P 500 ETF.
The number of thematic launches fell from 39 in 2023 to 13 this year, while thematic fund closures in 2024 have already surpassed the 2023 total, with 36 compared to 32, according to Morningstar.
Thematic ETFs are bucking this trend and have launched 18 products since December, including a Transatlantic Defense ETF, which invests in defense companies based in NATO member states, and a European Luxury ETF, with holdings in Ferrari NV and Watches of Switzerland Group PLC.
“I think once the S&P 500 mega-caps stop performing the way they are, the focus will shift back to thematic ETFs,” Krystkowiak said.
(Reporting by Suzanne McGee; Editing by Lewis Krauskopf and Rod Nickel)
