The rapid rise of artificial intelligence has become a major investment narrative, driving significant capital into thematic exchange-traded funds (ETFs) that allow retail investors to engage with key technology trends. However, experts caution that these funds can decline as swiftly as they rise, a critical consideration for investors as tech stocks have recently shown vulnerability, leading the market downward. The Nasdaq is nearing a dip below its 50-day moving average for the first time since April’s downturn, marking its third consecutive losing session.
Thematic ETFs, which focus on specific sectors or technologies, can yield substantial gains when a theme is popular, but momentum can wane. Within the disruptive technology category, which includes AI, there have been significant inflows this year. AI-focused ETFs have attracted nearly $20 billion, with $15 billion in funds featuring “AI” in their names.
Funds like the Global X Artificial Intelligence & Technology ETF and the Robotics & Artificial Intelligence ETF have seen considerable growth in assets, but thematic ETFs require more research due to their volatility. The ETF market has expanded significantly, with over 4,300 U.S.-listed ETFs now available, surpassing the number of individual stocks.
While the growth in ETFs is seen as beneficial, it also introduces more risk. Some investment themes can lose steam over time as they mature and are absorbed into broader market indexes. The lifecycle of a theme can lead to decreased attention and inflows, potentially diminishing high-growth opportunities.
Despite recent market fluctuations, the Nasdaq remains close to its all-time high and has increased by nearly 250% since the Covid low. Thematic investing is deemed worthwhile for informed investors who can handle short-term volatility. Capturing market opportunities is crucial with thematic strategies, and significant short-term gains might prompt investors to consider taking profits while maintaining some allocation to the theme.
