5 Traits Of Successful Thematic ETFs

August 27, 2018

[This article appears in our September 2018 issue of ETF Report.]

Everyone loves a success story, which is maybe why we love thematic ETFs so much. We’re all searching as investors for that lightning in a bottle, that killer product that launches at just the right time and captures an emerging trend or movement that other funds miss. Thematic ETFs offer just that.

But for every BOTZ or IBUY, there are a dozen other thematic funds that never quite take off, in terms of either assets or performance.

What separates the superstars from the super disappointments? It’s not an exact science, but as it turns out, the most successful thematic ETFs—as in, those that have exceeded $100 million in assets—share a few commonalities.

Some investment themes dominate the headlines so completely that when products tracking them finally launch, there’s not only a great sense of inevitability about their success, but significant pent-up demand waiting in the wings. Two great examples? Marijuana and blockchain.

The first pure-play marijuana and blockchain ETFs had strong out-of-the-gate flows when they launched. The ETFMG Alternative Harvest ETF (MJ), for example, drew $359 million in new net money in its first month of life—or 101% of its assets under management ($354 million as of this writing).

Same goes for the first two blockchain ETFs on the market, the $176 million Amplify Transformational Data Sharing ETF (BLOK) and the $119 million Reality Shares Nasdaq NextGen Economy ETF (BLCN), which drew respectively 102% and 94% of their assets under management (as of this writing) just in their first month of trading.   

Yet after that first month of super-sized inflows, investor money mostly dried up. Since February, MJ has brought in just $33 million in new net money. BLCN, meanwhile, has brought in only $13 million over the same period. BLOK has actually lost $13 million.

Even flows into competing products slowed or reversed once the initial excitement wore off. The AdvisorShares Vice ETF (ACT)—which actually launched before MJ’s current incarnation made its debut, but which is not a pure-play marijuana ETF—has never broken $20 million in assets; in the past six months, it’s seen outflows of $3 million.

Meanwhile, new blockchain products that launched after BLOK’s and BLCN’s initial splashes have also struggled to accrue significant assets: The First Trust Indxx Innovative Transaction & Process ETF (LEGR) and the Innovation Shares NextGen Protocol ETF (KOIN) have only drawn $46 million and $8 million in assets, respectively, even though both ETFs launched within two weeks of BLOK and BLCN.

Sometimes an investment theme is successful enough to grow beyond one or two hotshot funds, attracting many products and competitors, as well as steady, significant assets over time.

Clean energy, infrastructure and biotechnology were all once narrow, thematic plays, back when the first products tracking them launched in the mid-2000s. Over the years, however, assets accreted into their spaces like matter around stars, until slowly, over time, an entire solar system of products had developed.

Today there is $1 billion invested in nine clean energy ETFs, $4 billion invested in 12 infrastructure ETFs, and $19 billion invested in 14 biotechnology ETFs. In the clean energy segment, three ETFs have surpassed the $100 million mark. Meanwhile, infrastructure has four such funds, and biotechnology has seven, including two niche leveraged products.

When it comes to thematic investing, whichever ETF lands on the market first usually ends up becoming the dominant one long term.  

For example, although four ETFs have launched as plays on the so-called “Retailpocalypse” (meaning, the death of traditional brick-and-mortar retailers in favor of online e-commerce companies), only one fund has amassed significant assets so far: the $511 million Amplify Online Retail ETF (IBUY), which launched in 2016. IBUY continues to outdraw all other funds in the space in flows, even though on a year-to-date basis, it’s actually being outperformed by a newer fund, the ProShares Long Online/Short Stores ETF (CLIX), at 25% to 24%.


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A similar story is evident in infrastructure, where the $2.7 billion iShares Global Infrastructure ETF (IGF), which launched in 2007, is far and away the largest fund in the segment and gathers the most flows, even though newer funds like the Legg Mason Global Infrastructure ETF (INFR) and the FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA) are beating it over a 12-month basis.

Whenever there are two big ETFs tracking the same theme, the one that brings in the most money is inevitably the one that costs the least.

A good example of this was the race between two automation/robotics ETFs, the $2.2 billion Global X Robotics & Artificial Intelligence ETF (BOTZ) and the $2.1 billion ROBO Global Robotics And Automation Index ETF (ROBO). Though ROBO was launched in 2013, it wasn’t until BOTZ launched in late 2016 that flows into ROBO also began to accelerate, and the two engaged in an arms race for assets throughout most of 2017 and into 2018.

Yet BOTZ has a price tag that is 0.27 basis points lower than ROBO’s 0.95%, and unsurprisingly, BOTZ appears to have surpassed ROBO in flows. Over the past six months, for example, BOTZ has brought in $239 million, whereas ROBO has seen outflows of $72 million.

People who invest in themes really, really believe in those themes, to the point that bad returns don’t seem to have much effect on the flows into a thematic ETF.

So it goes for infrastructure, where IGF is down 1.9% year-to-date, but investors have poured $496 million in new net money into the fund so far this year. And in artificial intelligence, where BOTZ is down 4.5% year-to-date, investors have put $952 million into the fund in the same time period.

Yet while bad performance doesn’t scare away investors, good performance can lure in new ones. IBUY is up 30% year-to-date, and has seen inflows of $266 million over the same period, equivalent to 52% of the fund’s assets under management (as of this writing).

Meanwhile, the $163 million AI Powered Equity ETF (AIEQ), one of the first ETFs to have a portfolio constructed entirely by artificial intelligence, is up 13% year-to-date, beating the SPDR S&P 500 ETF Trust (SPY) by more than 7%. It has also pulled in $68 million in new money, equivalent to 42% of its level of assets at time of writing.


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