Hey there! Investors haven’t been interested in thematic funds so far this year, even though a lot of them are invested in popular tech stocks. This week’s ETF Wrap talks about why.
According to Strategas, the best days for thematic exchange-traded funds may have already passed. Smaller ETFs are especially likely to shut down.
“There’s just too much product chasing too few dollars,” wrote Todd Sohn, an ETF strategist at Strategas, in a note this week. Many of the themes may now be holdovers from the time of quantitative easing (QE), when high beta growth companies did very well and fit into a lot of different groups.
According to Strategas, a lot of new thematic ETFs came out in 2021. This was the peak year for them because the market was doing well thanks to the Federal Reserve’s low interest rate policy and its quantitative easing program, or QE. But in the past two years, more thematic funds have closed than opened. This is because of a very different monetary policy, with rates going up and quantitative tightening happening as the Fed tries to lower inflation.
According to data from FactSet as of June 26, $1.9 billion has left the actively managed ARK Innovation ETF ARKK so far this year. This is a well-known fund that invests in disruptive innovation. Some investors have taken out $160 million from the ETF in the last week. According to FactSet data, the ETF manages about $6 billion in assets.
Because their portfolio managers want to beat the market, actively managed funds usually cost more than passive index ETFs. The costs of running the ARK Innovation ETF are 0.75%.
According to FactSet data, shares of the ARK Innovation ETF are down about 16% so far this year as of Thursday. This is in contrast to the big gains made by the S&P 500 and the tech-heavy Nasdaq Composite in the first half of 2024.
On its website, ARK says that disruptive innovation is “the release of a new technologically enabled product or service that could transform the way the world works.”
Up 17.6% so far this year, shares of the Invesco QQQ Trust Series I QQQ, which follows the Nasdaq-100 index, have gone through the roof. Since June 26, $13.7 billion has been put into the fund this year, according to FactSet. On the other hand, the SPDR S&P 500 ETF Trust SPY has gained about 15% in the first half of 2024.
Sohn says that investors can choose from a wide range of ETFs that are based on the themes of innovation and disruption. Examples he used in his note were the SPDR S&P Kensho New Economies Composite ETF KOMP, the Invesco Nasdaq Next Gen 100 ETF QQQJ, the iShares U.S. Tech Breakthrough Multisector ETF TECB, the Goldman Sachs Innovate Equity ETF GINN, the Goldman Sachs Future Tech Leaders Equity ETF GTEK, the Main Thematic Innovation ETF TMAT, and the ALPS Disruptive Technologies ETF DTEC. There are many other smaller ETFs with less than $100 million in assets that he used as examples.
Sohn told me over the phone, “All of these came out because of the success of the ARK Innovation ETF.” “You started to see copy cats pop up everywhere,” he said, adding that the way each one is run is different. Sohn also said, “There’s a lot of similarity” between other ETF themes, such as tech, cars, and genome funds.
The “problem” of supply and demand
Sohn looked into it and found 186 small thematic ETFs that manage less than $50 million in assets. According to his research, that group has by far the most ETFs. The next largest group has 38 funds with assets between $50 million and $100 million.
His note shows that the only group of thematic ETFs that saw total inflows over the past year was the one with assets between $1.6 billion and $3.2 billion. Sohn said that there are more than 300 ETFs vying for just $120 billion in assets in the “thematic space.” He said that this has caused a “problem” with supply and demand.
Sohn told me over the phone that, according to data from ETF Action, $1.7 billion has been taken out of thematic ETFs so far this year.
From a business point of view, he said in the phone interview, managers of small funds with, say, $10 million in assets may find it hard to make money because the funds have high operating costs.
Choosing the right theme and the right time to enter and exit the market is “extremely challenging” for investors, Sohn’s note says, adding another “hurdle” for thematic ETFs.
He wrote that most of the money in actively managed thematic ETFs is linked to portfolios that focus on technology. He said in the note that the SPDR S&P 500 ETF Trust SPY has more than 30% of its assets in tech, so the broad U.S. market is already full of tech stocks.
He also found that companies like Nvidia, Broadcom Inc. AVGO, -0.34%, Meta Platforms Inc. META, +1.26%, Amazon.com Inc. AMZN, +2.19%, and Advanced Micro Devices Inc. AMD, +1.23% are included in ETFs that target the momentum factor, “hedge fund VIPs,” and “thematic all-stars.” Sohn found that the iShares MSCI USA Momentum Factor ETF MTUM, the Amplify Thematic All-Stars ETF MVPS, and the Goldman Sachs Hedge Industry VIP ETF GVIP all held those stocks.
Sohn says that investors should keep an eye on how much exposure they have to Nvidia through their ETFs because the company is expected to have a huge year in 2024 and is a big part of the S&P 500 and Nasdaq-100 indexes.
Amid all the talk about AI lately, Nvidia’s huge gains in 2024 have gotten a lot of attention. However, the GraniteShares Nasdaq Select Disruptors ETF DRUP is one of the funds with double-digit gains this year that doesn’t hold the chip maker right now.
The ETF has $58 million in assets under management. As of Thursday, FactSet data shows that it is up 16.2% this year. GraniteShares’ website says that as of June 26, its top holdings were Microsoft Corp. MSFT, +0.15%, Meta, Google parent Alphabet Inc., Adobe Inc. ADBE, +3.42%, and Salesforce.com Inc. CRM, +3.99%. There is an annual fee of 0.6% for the GraniteShares Nasdaq Select Disruptors ETF.
FactSet data shows that the Capital Group Growth ETF CGGR has gained 17.4% so far this year through Thursday. This is also an actively managed fund, but as of June 26, Nvidia was one of its top 10 holdings.
Scott Davis, head of ETFs at Capital Group, said over the phone, “It’s hard to pick the right theme at the right time.” But, he said, the Capital Group Growth ETF invests in a wide range of long-term trends, not just technology, to find growth. The fund also mainly holds U.S. stocks, he added.
Always, here are the best and worst-performing ETFs from last week through Wednesday, based on data from FactSet.
The good…
| Top performers | %Performance |
| AdvisorShares Pure US Cannabis ETF MSOS | 7.6 |
| YieldMax TSLA Option Income Strategy ETF TSLY | 3.8 |
| abrdn Physical Platinum Shares ETF PPLT | 3.0 |
| First Trust NYSE Arca Biotechnology Index Fund FBT | 2.9 |
| SPDR S&P Biotech ETF XBI | 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 CONY | -7.2 |
| ProShares Bitcoin Strategy ETF BITO | -6.3 |
| Bitwise Bitcoin ETF Trust BITB | -6.3 |
| ARK 21Shares Bitcoin ETF ARKB | -6.3 |
| iShares Bitcoin Trust IBIT | -6.3 |
| Source: FactSet |
