With investors increasingly turning to thematic funds, research by HANetf revealed that midstream energy and aviation were two of its top performing themes, while investors were most bullish on blockchain and clean energy.
According to independent exchange-traded fund (ETF) specialist HANetf’s thematic review for the first four months of 2022, 98.3% of professional investors have at least 5% exposure to thematic funds in their portfolio, while 73.3% have at least 15% exposure. Perhaps, more importantly, 90% of respondents indicated that they expect to increase their exposure to thematic funds over the next year, with 95% reporting increased interest from clients.
The survey revealed that 26.7% of the respondents are most bullish on blockchain, decentralised finance and the overall crypto economy. Another 25% identified clean and renewable energy as a hot investment opportunity.
A further 15% of respondents are feeling most positive about ecommerce, while 8.3% named cloud computing. Healthcare tech and the space economy both scored 6.7% and the travel and medical cannabis themes came in at 5%. Respondents were least bullish on electric vehicles, with just 1.7% feeling positive about the theme.
Best performing theme: Midstream energy
Data taken from Bloomberg and aggregated by HANetf shows that midstream energy was the best performing theme in the first four months of the year, with the Alerian Midstream Energy Dividend UCITS ETF [MMLP] delivering a return of more than 18%. This was fuelled by oil and gas prices soaring due to the war in Ukraine, strong demand for liquified natural gas exports and below-average inventories. It has also been helped by midstream energy companies increasingly becoming more ESG-focused.
“The price jump is particularly notable given that April is normally the time of the year when natural gas prices are moderate due to lower demand,” noted the report.
Despite the omicron variant grounding the travel industry in the early part of the year, the US Global Jets UCITS ETF [JETS] has been on an upward trend in the four months to the end of April. Investors are expecting the aviation industry to bounce back as air travel sees strong demand over the summer.
Worst performing theme: Ecommerce
The worst performing thematic funds in the first third of the year were Amplify Online Retail [IBUY] and Emerging Markets Internet and Ecommerce [EMQQ] with losses of 49% and 41%, respectively.
ETC Group Global Metaverse [METR], Europe’s first ETF dedicated to the metaverse and provides exposure to blockchain technologies and cryptocurrencies, was another poor performer with a negative return of 30%.
According to Citi analysts led by Andrew Lin, “some industry experts… argue that the metaverse story is more hype than substance, adding little value to users”. Nonetheless, they still see investment opportunities in the theme amid falling share prices, the analysts wrote in a note to clients seen by Barron’s. This could explain why 93.3% of investors polled by HANetf were either very or somewhat bullish on the metaverse theme.
A potential investment trap
Despite the optimism among investors polled by HANetf, it isn’t always wise to chase returns through ETFs, argued Morningstar’s director of passive strategies research, Bryan Armour, last month.
The appeal of ETFs is that investors can gain exposure to a trend without having to analyse a company’s financials, and the potential returns that come with this are tempting, Armour said. But the key to success is identifying trends before it’s too late.
“The problem is that investors are not particularly good at this — and they're not alone. Professional active managers struggle to beat passive benchmarks, and they have greater resources, training, and experience,” wrote Armour.
He analysed the performance of 111 US thematic ETFs from May 2019 to April 2022 and concluded that 71% of them underperformed the market, while, on average, investor returns were 11.4% less than the ETFs’ total returns.
“It’s easy to be swept up in narratives… but investors must consider what is currently priced into the theme they are buying,” Armour warned. “Buying opportunities are often long gone once investors recognise the trend.”