WisdomTree
Thematic Quarterly
Q2 2024
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Pierre Debru
Head of Quantitative Research and Multi Asset Solutions, WisdomTree Europe
Pierre heads the Quantitative Research & Multi Asset Solutions team in Europe for WisdomTree. Pierre joined the WisdomTree Research team in 2019 as a Director. Pierre focuses on cross-asset quantitative research, client portfolio solutions and Short and Leverage Investments. Prior to joining the company, Pierre worked in Investment Research for DWS and the XTrackers range for more than five years. During this period, he focused on Smart Beta Investments, Model Portfolio Construction and Thought Leadership. Pierre has more than 17 years’ experience in investments and structured asset management. He graduated from Ecole Central Paris and obtained a Master of Science in Mathematics applied to Finance.
In our quarterly thematic review, we analyse the state of thematic strategies in Europe through the lens of performance and flows, as well as any other interesting trends we see in the space. For all of our calculations, we use the WisdomTree Thematic Classification, which we monitor and update on a quarterly basis. More insights on the thematic space in Europe can also be found in our latest monthly European thematic update, which you can sign up for here.
Q2 summary
The second quarter of 2024 experienced significant market pressure when compared to Q1. From a macro perspective, US inflation remained unexpectedly stable compared to late last year, and the job market continued to boom. These developments triggered a shift in expectations for Federal Reserve rate cuts, resulting in fewer and later rate cuts projected for 2024. This shift put considerable pressure on the market, especially on mid and small caps, through funding costs and valuations. Additionally, while artificial intelligence (AI) remained a hot topic, its role became increasingly mixed from investors’ perspectives, increasing pressure on some tech companies.
Themes generally declined in April, with only five themes performing above flat for the month. After a general rebound in May, themes ended with mixed performances in June. Overall, the market gained 2.9%, with only seven themes outperforming the market in Q2 and 17 themes finishing above flat for the quarter. The top three performing themes from the ‘Technological Shifts’ group were ‘Semiconductors,’ ‘NextGen Communications,’ and ‘Gaming & Entertainment,’ returning 12.5%, 7.2%, and 5.5%, respectively.
Winners and losers
Although ‘Technological Shifts’ was the worst-performing cluster in April, it outperformed ‘Geopolitical Shifts’ in May and June to become the best-performing cluster in Q2. Four of the top five themes are from this cluster.
‘Semiconductors’ continued its strong performance from Q1 and was the best-performing theme in Q2, buoyed by optimism following Nvidia’s strong earnings. Notably, the theme’s quarter-to-date (QTD) return of 12.5% was lower than the 24.2% level in Q1, indicating the market’s growing caution due to concerns about overvaluation and whether such high sales growth can continue. ‘NextGen Communications,’ which mainly focuses on 5G technology and communication devices, including smartphones and laptops, was the second-best performing theme in Q2 with a gain of 7.2%. It benefited from a strong performance by chip makers and the potential trend of emerging AI devices such as AI laptops and the upcoming AI phones announced by Apple.
‘Political Polarisation’ is the only non-tech theme in the top five performing themes. In Q2, the US presidential election debate and the elections in Europe added noise to the market but also fuelled this niche theme, driving it to gain 5.4%.
While AI brought tailwinds to some players in the tech area, it also raised concerns in other tech segments. Cloud computing companies were not only questioned about slower growth rates compared to the higher level during the zero interest rate period but also about whether generative AI technologies could replace their cloud services. These concerns dragged it down to the second-worst performing theme, with a loss of 5.4% in Q2.
‘Sustainable Energy Storage’ was the bottom theme, losing 7.8% in Q2. Since the theme mainly focuses on battery production and mining and refining relevant metals, and China plays a significant role in this area, the relevant stocks were negatively affected by China’s weak recovery. Meanwhile, the US presidential election added concerns about whether the US will switch its current supporting policy to sustainable energy industries. These negative points and high interest rates put pressure on the theme.
Figure 1: Quarter-to-date (QTD) returns of themes in Europe within the WisdomTree Thematic Classification
Flows roundup
Flows in Q2 remained negative, with outflows of $5.8 billion in Europe, though slower than the outflows in Q1. European thematic ETFs saw inflows of $1.0 billion, while European thematic open-ended funds experienced outflows of $6.8 billion. Continuing the trend since 2023, the bulk of the outflows came from open-ended funds, with ETF flows proving more resilient. ETFs’ market share increased further to 14.2% due to better flow performance.
In Q2, European thematic open-ended funds suffered outflows across all clusters except ‘Geopolitical Shifts,’ which had marginal inflows of $155 million. European thematic ETFs, however, saw inflows in all clusters, with the most significant flows in ‘Geopolitical Shifts,’ followed by the ‘Environmental Pressures’ cluster. Outflows in Q2 were substantial from the ‘Environmental Pressures’ cluster in open-ended funds ($4.2 billion) but slightly flowed into ETFs ($0.3 billion). Outflows in the ‘Environmental Pressures’ cluster were primarily driven by redemptions in open-ended funds at the sub-cluster level ($0.9 billion) and the ‘Sustainable Energy Production’ ($1.6 billion) theme.
At the theme level, the top three themes remained the same as in Q1, but their order changed. ‘Rise of Tension’ from the ‘Geopolitical Shifts’ cluster surpassed ‘AI & Big Data,’ attracting the most flows of $462 million in Q2 after posting a strong return in Q1. ‘AI & Big Data’ and ‘Semiconductors’ followed, collectively gathering $704 million. This is much lower than the collective inflows of $2.2 billion to these two themes in Q1, indicating investors’ hesitation about these themes. ‘Sustainable Energy Production’ continued to see the most outflows, with another $1.6 billion in Q2, albeit lower than the previous quarter. ‘HealthTech’ and ‘Robotics & Automation’ followed with $827 million and $427 million in outflows, respectively.
Figure 2: QTD flows into thematic products in Europe within the WisdomTree Thematic Classification
Trends in assets under management (AUM) and launches
Joint AUM in European thematic ETFs and open-ended funds decreased in Q2 to $328.2 billion, primarily driven by outflows from open-ended mutual funds. ETFs’ market share is increasing further to 14.2%, with a total AUM of $46.5 billion. The AUM in thematic ETFs in Europe reached its highest level since December 2021. This highlights the bifurcation we continue to observe between Thematic ETFs and open-ended funds.
The order of the top nine themes was the same as in Q1. ‘Sustainable Energy Production’, despite seeing outflows of $1.6 billion in Q2, remains the most prominent theme in Europe. ‘AI & Big Data’ ranked fifth and continued to grow – only $0.7 billion off the fourth. At the cluster level, ‘Environmental Pressures’ was still the biggest one with an AUM of $129.2 billion, but the gap between ‘Environmental Pressures’ and ‘Technological Shifts’ is narrowing to $12.3 billion.
Figure 3: Top 10 themes in Europe by AUM
Thematic launches have generally been slower compared to past years since 2020. ETF launches slightly recovered, with 11 ETFs launched in Q2. Open-ended funds, however, still saw a low number of launches, with 14 open-end funds launched in Q2.
Eight of the newly launched products fall under the ‘Environmental Pressures’ cluster. Despite ‘AI and Big Data’ and ‘HealthTech’ being the most launched themes in 2023, no corresponding thematic funds focusing on the two themes were launched in Q1 2024. 10 of the newly launched funds fall under the ‘Technological Shifts’ cluster, and six fall under the ‘Environmental Pressures’ cluster. ‘Sustainable Energy Production’, the theme with the most AUM, saw no corresponding thematic funds launched in Q2.