Significant developments in artificial intelligence, big data, robotics, and automation have been key drivers of increased investments in thematic ETFs over the past year, according to research.
Trackinsight’s 2024 Global ETF Survey, conducted in partnership with JP Morgan Asset Management and State Street, found that while ETF investments have surged in popularity around the world, interest in thematic investing has continued to wane since its pandemic peak.
According to the data, the global ETF market has witnessed an annual growth rate of around 17.2 per cent, soaring from US$2.61 trillion in 2014 to an impressive total value of US$11 trillion in 2023.
While assets under management in the Asia-Pacific region stood at US$155.2 billion in 2014, they grew to a noteworthy US$741.6 billion by 2023.
However, in terms of asset class flows, thematic ETFs are still trailing, following their rapid ascent during the pandemic amid the black swan event.
“Investment dynamics were profoundly influenced by the black swan pandemic event, precipitating a pivot toward longer-term perspectives, especially within industries poised to benefit from emerging trends, while also being essential for global decarbonisation and digitalisation,” the report stated.
“This shift energised thematic investing, underpinned by low interest rates, fiscal stimulus, and an abundance of innovative investment themes, empowering investors to seize opportunities arising from these structural trends.”
In 2021, this emerging investment segment drew in more than US$100 billion in inflows across various themes and trends, including net zero 2050 (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, as the global economy adjusted to the post-pandemic era and numerous central banks commenced monetary tightening policies to combat inflation concerns, thematic investing hit a roadblock in 2022.
An outlier remained thematic ETFs focused on the energy transition, given the energy crisis stemming from the invasion of Ukraine, with European thematic ETFs seeing inflows of US$15 billion.
In 2023, the segment continued to fall out of favour, and attracted investment of just US$6.7 billion, a sharp decline from the US$14.94 billion seen in the previous year.
“In response to unfavourable market conditions, ETF issuers strategically liquidated underperforming thematic ETFs with low investor interest, adopting a more conservative strategy for introducing new offerings,” the report said.
While new investments in thematic ETFs have witnessed a general decline, specific themes such as artificial intelligence, big data, robotics, and automation have defied this trend, experiencing a notable surge in popularity.
This growing interest is attributed to advancements made by OpenAI in November 2022, including the groundbreaking launch of their advanced large language model (LLM) and ChatGPT.
“These innovations have ignited a wave of new developments and intensified competition among major technology firms like Microsoft, Google and other beneficiaries, underscoring the potential and significance of AI across various sectors,” the report added.
Similarly, the nuclear energy theme attracted nearly US$1 billion in new funds in the US and approximately US$261 million in Europe last year.
The report highlighted that the prevailing sentiment in the global energy market is becoming increasingly favourable towards nuclear power, “a trend underscored by the decision to restart and expand nuclear power plants across the globe”, it said.
“Countries such as Japan, China, India, and Turkey have announced plans to construct 63 new reactors, reflecting a significant commitment to nuclear energy. This positive outlook was further reinforced at the COP28 summit, where a coalition of 24 nations endorsed a Ministerial Declaration advocating for a threefold increase in global nuclear energy capacity by 2050,” it said.
It pointed out that amid these developments, uranium prices have surged to 15-year highs, which bodes well for both the industry and related ETFs, alongside the overarching goals of decarbonisation and digitalisation.
The report also looked at the top-performing thematic ETFs in the US over the past year, with blockchain emerging as the winner, followed by next-generation internet, and the metaverse.
Looking forward, the survey indicated that almost 70 per cent of investors have an interest or current investment in thematic ETFs. In comparison, 32 per cent have not yet ventured into this space.
Outlining their primary reason for investing in this segment, nearly 60 per cent cited strategic long-term bet, followed by diversification (45 per cent) and high conviction (40 per cent).
