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A $50B letdown: How themed funds lost their mojo in 2019

Despite surpassing the performance of the S&P 500, the ROBO Global Robotics and Automation Index ETF saw outflows of $247 million, while the Global X Robotics & Artificial Intelligence ETF lost $170 million to withdrawals.
Despite surpassing the performance of the S&P 500, the ROBO Global Robotics and Automation Index ETF saw outflows of $247 million, while the Global X Robotics & Artificial Intelligence ETF lost $170 million to withdrawals.
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One of the most hyped segments of the ETF fund industry has hit a rough patch.

Thematic ETFs, which focus on industries like robotics, blockchain or cannabis, closed 2019 with about $51 billion under management, just 1% more than the previous high point for assets reached 15 months earlier, according to data compiled by Bloomberg Intelligence. By contrast, the overall U.S. ETF industry has grown 20% during the same period, and now oversees $4.4 trillion.

That’s bad news for scores of asset managers looking to exploit the popularity of themed investing. With more than 2,000 ETFs competing for market share in the U.S., these issuers have focused on emerging trends in a bid to differentiate their companies and their products. But with asset growth now slowing, issuers will have to pick their spots more carefully.

“It’s concerning,” said Edward Lopez, head of ETF product at VanEck, which runs more than 50 ETFs in the U.S., including funds focused on video gaming and agribusiness. “We’re going to be very thoughtful about any thematic that we put out there. We’re not going to try to chase fads.”

Thematic funds gained in popularity as investors sought new ways to boost their performance and financial advisors tried to reinvigorate client engagement. Global X even trademarked the phrase “conversational alpha” to describe how thematic funds can enhance the investor experience.

But after a two-and-a-half-year meteoric rise, themed ETFs lost more than 20% of their market capitalization when stocks plunged in the fourth quarter of 2018. While managers recouped much of that money last year, thanks to a bull market that helped assets inch past the previous high, investors added the least new money to these funds since 2016.

Instead, investors yanked cash from funds devoted to natural resources, and from those tracking robotics and AI. Despite surpassing the performance of the S&P 500, the ROBO Global Robotics and Automation Index ETF saw outflows of $247 million, while the Global X Robotics & Artificial Intelligence ETF lost $170 million to withdrawals.

The impact of China’s trade dispute with the U.S. on technology-related sectors was the “biggest challenge” to thematic funds in 2019, said Jay Jacobs, Global X’s head of research and strategy, who expects assets to continue to grow over the long term.

The top 20 nearly doubled their gains over the last year, data show.
October 23

Perhaps, but investors made a smart decision moving away from thematic funds in 2019. The S&P 500 returned almost 30%, the most in six years, boosting the performance of diversified products.

Still, it’s not all doom and gloom for thematic funds. Out of the 33 debuts in 2019, several ETFs made a buzz and attracted inflows. For example, the Global X Cloud Computing ETF (CLOU), which began trading in April, now has $443 million, while the Defiance Next Gen Connectivity ETF has $162 million.

Heading into 2020, much will depend on the performance of broader markets, and whether thematics can again offer investors more bang for their buck.

Investors “will find the long-term growth potential in narrow ETFs more compelling,” said Todd Rosenbluth, a CFRA Research analyst who expects modest returns for U.S. equities this year. “This is a short-term blip. There is potential for some of these products to outperform in 2020.”

Bloomberg News