Cathie Wood’s Ark is still setting the pace in thematic ETF boom

It’s a measure of Cathie Wood’s popularity that the main fund at Ark Investment Management saw money exit last week and still had the greatest inflows for any U.S. thematic ETF in January.

In fact, thematic ETFs enjoyed their best month on record, according to data compiled by Bloomberg, with $15 billion poured into the breed, which focuses on specific market niches like e-commerce, genomics and sports betting. The $23 billion ARK Innovation ETF (ARKK) topped the list by adding more than $3 billion.

Bloomberg News

All five of Wood’s active products took the top spots in the thematic space last month, for a total of $8 billion added. The second place — Ark Genomic Revolution ETF (ARKG) — gained $2.4 billion alone, as it rose 9% compared with a 1% drop for the S&P 500.

While the Redditors on WallStreetBets dominated headlines last week, fueling massive gains in certain heavily shorted stocks like GameStop and AMC Entertainment Holdings, the rush toward Ark’s funds slowed as the mania sent waves through markets. Wood’s red-hot appeal may be cooling, but the broader category is poised to continue its growth, especially as retail investors flood the market and invest based on understandable narratives.

“The fact that they’re easier to understand makes it easier for investors to adopt,” said David Perlman, an ETF strategist at UBS Global Wealth Management, about thematic funds. “You’ve just seen really strong performance, and they’re something that clients and investors can relate to.”

In the broader thematic universe, products that stand to benefit from President Biden taking office jumped in January. The Global X Autonomous & Electric Vehicles ETF (DRIV) added more than $500 million, while the firm’s U.S. Infrastructure Development ETF (PAVE) attracted a record $354 million.

More concentrated bets in thematic ETFs may be contributing to their success, according to Bloomberg Intelligence analyst Athanasios Psarofagis. These funds have an average of 70 positions, compared to 192 positions for ETFs launched in 2020. About three-quarters of thematic funds beat the S&P 500 in 2020, the most out of any category since at least 2014.

ESG gains
At the same time, ETFs focused on ESG factors added a record $6.2 billion in January, amid the Democratic sweep of both houses of the U.S. Congress, increasing the odds that Biden’s energy policies will be enacted.

The iShares Global Clean Energy ETF (ICLN) gained almost $1.7 billion, the most since its inception in 2008, while the Invesco Solar ETF (TAN) attracted a record $860 million.

Active management

Actively managed funds with the biggest gains of 2020

The top 20 carried an average expense ratio of more than three times the broader industry.

By Andrew Shilling

January 20

“We’re seeing a new generation of investors that cares about ESG from millennial standpoint,” said Tony Roth, chief investment officer of Wilmington Trust. “The new administration is very friendly and the regulatory environment should be very friendly to those types of companies.”

Although two BlackRock products — the iShares ESG Aware MSCI USA ETF (ESGU) and iShares ESG Aware MSCI EM ETF (ESGE) — dominated the ESG scene in the U.S. last year, attracting about half of all inflows, the bets are now broadening out.

“There are plenty of ESG options now,” said James Pillow, manager director at Moors & Cabot Inc. “As younger and younger investors gain influence, once should expect the ESG to grow. After all, ESG is active management with heart.”