‘Thematic Fatigue’ Hobbles Once-Hot Slice of ETFs With Outflows

A once-hot sliver of the exchange-traded funds universe focused on thematic investing is having another difficult year.

(Bloomberg) — A once-hot sliver of the exchange-traded funds universe focused on thematic investing is having another difficult year. 

Investors have yanked roughly $2.6 billion from these types of ETFs so far in 2023, putting them on pace for their worst year of outflows in data going back to 2001, according to Bloomberg Intelligence. If the trend holds it will be the second consecutive year of cash leaving thematic funds, the first such losing streak of the last two decades. 

Much of the cash drainage can be attributed to funds that are part of the ARK Investment Management suite, where the firm’s Innovation fund (ticker ARKK) has seen more than $450 million flee this year. Money has also come out of the ARK Next Generation Internet ETF (ARKW), as well as out of the ARK Genomic Revolution ETF (ARKG), among others. 

“I call it thematic fatigue,” said Bloomberg Intelligence’s Athanasios Psarofagis. “People got burned by themes, like with ARKK. So they either are already in and don’t want to allocate more, or didn’t want to chase returns. Flows just flatlined.”

It’s a dramatic comedown for the once-sizzling strategies, which over 2020 and 2021 took in more than $94 billion of combined inflows. Over the years, issuers had looked to take advantage of heightened investor interest in thematic funds, with companies launching products based on self-driving cars, pet care, space exploration, marijuana products, and much more. Many opted for catchy tickers that they hoped would help them stand out in the saturated ETFs space.

But it’s not just ARK funds that have seen outflows — money has also been pulled from clean energy, cloud computing, natural resources, fintech and cybersecurity-centered products, among many others, the data compiled by BI show. ETFs targeting electric cars and batteries have seen more than $500 million leave, while those focused on travel and leisure have suffered outflows of more than $800 million. 

So many investors have been hurt by their thematic-ETF investments that they’re now questioning why they need the exposure, said Todd Sohn, ETF strategist at Strategas. 

There are additional factors at play working against thematics — including too many questionable variables and the trajectory of interest rates — in today’s environment that it makes it difficult for investors to allocate toward them, according to Sohn.

“The high-beta stuff is fantastic to ride in strong markets — that’s juice for traders,” he said. “And the ticker game is fun, but not when the ETFs are going down 80% to 90%.”

–With assistance from Sam Potter.

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