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Is the energy transition being left out of the thematic ETF resurgence?

By Jessica Penny
4 minute read

Thematic ETFs are back in favour but those tracking the energy transition are being left behind, according to new data.

While the energy transition dominated thematic ETF inflows in 2023, according to new data from Global X, they fell out of favour with Australian investors in 2024 to become the poorest performers among their thematic peers in the year to 31 March.

Marc Jocum, Global X ETFs product and investment strategist, said the declining flows into energy ETFs can be attributed to several factors.

“Firstly, the rise in interest rates has increased borrowing costs, impacting sectors like energy transition companies that have a heavier reliance on debt financing to fund long-term operations,” Jocum told InvestorDaily.

He, however, noted outflows in 2024 could have less to do with energy transition ETFs themselves, and more to do with the increasing popularity of areas such as technology, semiconductors, cyber security, and artificial intelligence.

Moreover, he explained the bulk of the ETF flows are being allocated to low-cost vanilla ETFs this year, as the core of client portfolios.

“To start the year, we have seen a ‘risk-on’ sentiment of money being allocated to broadly diversified global share ETFs and technology themes. Investors appear to be prioritising immediate profits over future ones, particularly those projected for net-zero emissions by 2050.”

Interestingly, outflows from diversified clean energy and climate change ETFs outweighed those from specific renewable energies, according to Jocum, indicating a “nuanced landscape” within the energy transition investing sector.

“While overall flows have declined, specific sub-sectors, like copper and uranium miners, continue to attract investment and have been performing well,” Jocum said.

Expounding on this, Jocum highlighted the presence of “green fatigue”, noting that flows into Australian-listed sustainable ETFs are at their lowest levels since 2018.

“This fatigue represents a reallocation of investor dollars and a slowdown in momentum rather than a complete abandonment of impact investing.

“It is not just investors who are rethinking their sustainable investing allocations. Companies are trying to balance the long-term necessity of sustainable goals while also focusing on shorter-term financial returns.”

Fatigue from political polarisation could also be a factor too, he said. However, from a global perspective, he highlighted, the flows would suggest that demand for ESG investing is higher in regions like Australia and Europe versus the US.

Ultimately, Jocum believes energy transition ETFs could rebound.

“A rudimental tenant of investing is higher interest rates decrease the value of long-term cash flows. However, the decarbonisation theme remains a long-term structural megatrend, suggesting that money flowing into energy transition ETFs may resume as the year progresses,” he concluded.

Thematic ETFs set for resurgence

Thematic ETFs – of which there are now 40 available in the local market with some $5.4 billion of Australian investor capital behind them – have been a “key innovation” in the ETF industry, Global X noted.

In 2021, this emerging investment segment drew in more than US$100 billion globally in inflows across various themes and trends, including the net zero 2050 trend (US$12 billion), China digitalisation (US$8.8 billion), alternative energy (US$8.5 billion), and cyber security (US$4.8 billion) among others.

However, during 2022 and 2023, Australian thematic ETFs fell out of favour amid increasing interest rates in response to inflationary pressures.

“After taking in over $2.2 billion in net flows in 2021, a 10th of this came into thematic ETFs in 2023,” Global X said.

While areas such as virtual reality, food, and cloud computing have not seen the same traction, AI-related ETFs, particularly in semiconductors, have “exploded” in 2024, according to the ETF provider.

“This trend is anticipated to persist, as AI represents a significant megatrend shaping the future in terms of product innovation, industrial efficiencies, and productivity improvements,” the firm said.

In particular, robotics and artificial intelligence ETFs have more than doubled in terms of popularity compared to last year, while investors allocated over $53 million into semiconductor ETFs in the first three months of the year.

Cyber security ETFs also saw stronger levels of support, with local investors pumping some $30 million into cyber security ETFs so far in 2024, compared with just $270,000 in 2023.

“We anticipate ongoing product innovation within thematic ETFs and increased use by investors as satellite exposures in their portfolios, allowing them to express tailored investment perspectives,” Global X highlighted.

“Rather than being seen as speculative unsustainable bets, thematic ETFs are being increasingly integrated into portfolios as long-term allocations to express structural outlooks on innovation and global trajectories.”