WisdomTree
Thematic Quarterly
Q1 2024
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.
Q1 summary
After rebounding in Q4 2023, the markets continued the upward trend in Q1 2024. This was primarily driven by the resilience of the US economy and sustained enthusiasm around Artificial Intelligence (AI), which was further boosted by strong corporate earnings. The anticipation of interest rate reductions further fortified the equity markets, although the pace of cuts is likely to be slower than initially expected. Overall, the market gained 8.2% and only seven themes outperformed the period. ‘Semiconductors’, ‘Rise of Tension’ and ‘Near/Reshoring’ were the top three performers over the quarter, returning 24.2%, 20.2% and 13.4% respectively. Focusing on the month of March more specifically, 14 themes managed to outperform the 3.1% of the MSCI ACWI. ‘Energy Transition Materials’, ‘Blockchain’ and ‘Natural Resources’ were the top three performers.
Winners and losers
‘Geopolitical Shifts’ overtook ‘Technological Shifts’ to become the best-performing cluster in Q1. Two of the top three performing themes, ‘Rise of Tension’ and ‘Near/Reshoring’, in the first quarter come from this cluster, showing a lot of strength in the complicated geopolitical landscape. The performance of the ‘Technological Shifts’ cluster was mixed. Five of the top ten performing themes, including ‘Semiconductors’, ‘Blockchain’ and ‘Artificial Intelligence and Big Data’, were from the cluster, while two of the bottom five themes, ‘Rise of China Tech’ and ‘Space’, were also from it.
The ‘Semiconductors’ theme, as an adjacent theme of AI, was the best-performing theme (+24.2%) in Q1 thanks to strong earnings growth and the release of new chips. The AI boom we’ve been experiencing since the release of OpenAI continues, fuelling imaginations and predictions about the productivity gains that AI can make. After returning approximately 44% since last year, the ‘AI and Big Data’ theme still returned 8.6% in the first quarter of this year.
The ongoing Russia-Ukraine war and rising tension in the Middle East, while deeply unfortunate, have inadvertently presented defence companies with perhaps the most substantial increase since the end of the Cold War. With several major economies announcing increases in defence budgets relative to their GDP, these developments have benefitted defence companies and are also reflected in the ‘Rise of Tension’ theme. Another theme that is also affected by geopolitical factors is ‘Near/Reshoring’. US-China tensions, as well as the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA), are influencing and driving the reshaping of global supply chains in several ways. The Federal Government's plans to invest in infrastructure and emerging industries could also have a variable impact on this theme as the US moves into a critical election period.
Regarding the worst-performing themes, none of the themes in the ‘Environmental Pressures’ cluster outperformed the market in Q1. Three of the bottom five performing themes, ‘Sustainable Energy Storage’ (-8.0%), ‘Sustainable Energy Production’ (-6.8%) and ‘Decarbonisation’ (-4.0%), are from this cluster. ‘China Tech’, however, made a modest recovery in February, and remains an overall underperformer so far this year.
Figure 1: Quarter-to-date (QTD) returns of themes in Europe within the WisdomTree Thematic Classification
Overall, Artificial Intelligence and its adjacent themes, such as semiconductors, robotics, and automation, continue to deliver solid returns. Green themes, particularly sustainable energy themes, continued last year's decline and underperformed. The ‘Geopolitical Shifts’ cluster has given us something to talk about with the ‘Rise of Tension’ theme up around 55% over the past 12 months. It will be interesting to see how this theme performs in the future as geopolitical tensions rise and several major economies enter an election year.
Flows roundup
Flows in Q1 remained negative, with an outflow of $10.3 billion in Europe: $0.9 billion inflows of exchange-traded funds (ETFs) and $11.2 billion outflows of open-ended funds. However, the bulk of the outflows continue to come from open-ended funds. This is a continuation of the trend observed in 2023, with ETF flows being more resilient. ETFs’ market share is increasing further to 13.7% on the back of better flow performance.
European open-ended funds have suffered outflows across all clusters. ETFs have gathered the most flows in ‘Technological Shifts’ followed by the ‘Geopolitical Shifts’ cluster. Outflows have been strong out of the ‘Environmental Pressures’ both from open-ended funds ($8.1 billion) and ETFs ($0.6 billion). Outflows in the ‘Environmental Pressures’ cluster have been mostly driven by redemptions in open-ended funds at the sub-cluster level as well as ‘Sustainable Energy Production’, ‘Sustainable Resource Management’, ‘Water’ and ‘Sustainable Food’ themes.
At the theme level, ‘AI & Big Data’ has gathered by far the most assets with $1.6 billion of inflows. Trends in Q1 remained similar with ‘AI’ and ‘Semiconductors’ continuing to gather the most flows. Only five themes managed to breach $100m of inflows in Q1. In contrast, ‘Sustainable Energy Production’ lost nearly $3 billion combined from ETFs and open-ended funds. ‘Sustainable Resource Management’ lost $869 million. ‘Water’ closed as the worst three themes, based on flows, with an outflow of $663 million.
Figure 2: Quarter-to-date (QTD) flows into thematic products in Europe within the WisdomTree Thematic Classification ($ millions)
Trends in assets under management (AUM) and launches
AUM in thematic ETFs and open-ended funds increased in March to $334.2 billion driven by strong performance and despite outflows of open-ended mutual funds. ETFs’ market share is increasing further to 13.7%, on the back of better flows, with a total AUM of $45.9 billion. AUM in ETFs is now up compared to last year and less than 1 billion off the all-time high in December 2021. This highlights the bifurcation we continue to observe between Thematic ETFs and open-ended funds. ETF performance and flows have been more resilient since mid-2023.
‘Sustainable Energy Production’ remains the biggest theme in Europe, even though its outflows in Q1 were nearly $3 billion. ‘AI & Big Data’ continues to grow and rise in the top five. ‘Sustainable Resource Management’ slipped from fourth to fifth place. The gap between ‘Environmental Pressures’ and ‘Technological Shifts’ is narrowing.
Figure 3: Top 10 themes in Europe by AUM ($, millions)
Thematic launches have slowed in 2024, with only five ETFs and 10 open-ended funds launched in the first quarter – the slowest pace since 2019. 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.