One of the most popular categories of funds available to investors are those offering thematic exposure. This category leverages a specific theme or themes that have gained traction economically and within popular culture. Thematic ETFs range from the speculative (ARKX Space Exploration & Innovation ETF) to things we take for granted (Global X Infrastructure Development ETF). For this Thursday we reviewed the performance of popular thematic categories and offer sector related insights into drivers of performance. We look at a handful of the largest ETFs by AUM operating in each category.
Our performance charts compare funds to the S&P 500 index over the past 12-months.
Note: Yesterday afternoon’s Fed announcement dropped halfway through the compilation of this report. We will be putting a note out later today on the fallout from the Fed’s decision as the market digests the news.
Our key takeaways on thematic ETFs are as follows:
- Outperforming Themes: Robotics & AI, Cyber Security, Crypto, Low Carbon, US-based
- Underperforming: Alternative Energy, Healthcare Related, Infrastructure, International exposures
- Growth stocks are clear outperformers vs. Value YTD across these themes
- Mag7 stocks are present in many of these thematic portfolios which elevates correlation of returns
- International exposure is a clear headwind to performance across the themes covered.
Themes (A-Z)
Aging
- The Global Millennial Fund (MILN) ends up being an odd bedfellow in this category, as its mainly focused on widely adopted technology solutions
- Most “Aging” themed ETFs are focused on the Pharmaceutical, Biotech and Managed Care industries and as such have been lagging with Healthcare stocks generally for much of this year
- We are not those who lionize the assassin who gunned down a healthcare group CEO in NYC recently, but the media circus around that crime and the vitriolic sentiment is emblematic of a broken system that serves no one well. The stocks charts show this unambiguously with only a few exceptions
Alternative Energy
- Given weak commodities prices, lack of outperformance in the Alternative Energy space is unsurprising
- 2024 has seen retracement of 5yr gains
- Solar has lagged nuclear this year
- CCJ is the largest nuclear stock constituent exposure at $23B and is a buy in our work
- Big solar stocks FSLR, ENPH and SEDG remain sells by contrast
ARK Funds
- ARK Funds burst on the scene with high profile performance during the pandemic and the resulting lockdown
- Since those heady days several funds have retraced gains, bottomed out, and are now the object of bullish speculation again
- The ARK Fintech fund has led in the 2nd half of 2024 while the Innovation and Robotics funds are also showing constructive bullish reversals
- We have buy ratings on top holdings NVDA, AMZN, TSLA, META, PLTR, SHOP, COIN, TTD, RBLX, SQ and ACHR
Crypto
- Crypto has been on fire since the Fed came through with a dovish interest rate policy prescription
- The pace of advance is unsustainable over the long term, but the next month or two could see further big gains realized
- CIFR, BTDR, MARA, CORZ are new upstarts to go along with “old heads” COIN, SQ and MSTR
Cyber Security
- Cyber has executed a sharp pivot in performance vs. the S&P 500 since mid-year
- Fixtures like AVGO, CRWD, FTNT and PANW remain notable buy rated stocks in our work
- We also note sharp bullish reversals in QLYS and FSLY that are worth looking into
- LDOS, GEN and FFIV are other buy rated names we like in Cyber
Infrastructure
- Similar to Water funds, infrastructure has faced headwinds to performance in 2024
- A mix of utilities, airport and highway operators, transports, MLP’s and energy storage and data centers and cellular service providers, infrastructure is typically a quality and income play which does best when equities are stable, but performance is subdued
- In a year when the S&P 500 has posted a 28% gain, these funds struggle to keep up.
- Our favorite ideas within these holding profiles are OKE, VST, TRGP and DTM
Internet
- Chinese shares can’t seem to get out of their own way in 2024 with a big spike in performance around government interventions in September/October showing no upside follow-through
- Domestic internet funds are outperforming due to big Tech exposure and a mixture of Small and MidCap software names that have generally been outperformers in the cycle
- We like TTD, SQ, DDOG, MELI, SHOP, NET, HOOD, PSTG, ROKU
Low Carbon
- Low carbon funds in the US have outperformed, but that status is tenuous as demonstrated by the recent pull-back in shares
- The largest funds like USCA and PABU are basically large cap. generalist funds with such environmental leaders as XOM and SLB
- We don’t see a ton of differentiation in these funds
Robotics & AI
- Performance of Robotics and AI ETF’s is all over the map this year
- The best performing funds are anchored by core holdings AAPL, MSFT, NVDA, GOOGL, META, ORCL, BAC and CRM
- All of the above are buys in our stock level work with the exception of MSFT
Space
- Space focused funds have a broad mix of satellite, Aero/Defense, and Small/Mid Software and industrial co.’s
- AMZN is also in the space business
- RKLB, COHR, FTI, LDOS and Elbit Systems are names that we recommend
Water
- Water funds have gone nowhere with high volatility
- Most of the largest holdings in the First Trust Water ETF have been correcting in 2024. The best stock charts are found in the small/mid space
- We like domestic names like PNR, ACM, PRMB, MLI and BMI
Data sourced from FactSet Research Systems Inc.
