In a broadly positive year for equity markets, thematic returns were extremely polarised.
From top to bottom performance dispersion edged towards 120% across themes, with the Amundi MSCI Semiconductor ESG Screened UCITS ETF (SEMG) returning 78%, versus -41.5% for the HANetf Electric Vehicle Charging Infrastructure UCITS ETF (ELEP).
The artificial intelligence (AI) boom was the key driver behind many tech-focused themes, while strong headwinds facing energy transition sectors buffeted much of their returns.
Omar Moufti, thematic and sector product specialist at BlackRock, said: “It was a year of great polarisation for thematics, but it is important to remember it was another thematic-driven year.
“Tech-orientated themes did very well, driven by artificial intelligence while non-tech orientated themes were relatively middling and even poor in some cases.”
The huge divergence in performance between themes gives investors great opportunities, but makes the age-old question around the timing of thematic investing even more important.
With this in mind, ETF Stream has selected five thematic ETFs that have the potential to outperform in 2024.
Future of Defence UCITS ETF (NATO)
As the geopolitical landscape continues to intensify defence has become a legitimate theme for investors.
The recent conflict between Israel and Hamas as well as the Houthi rebel attacks on shipping containers in the Red Sea has helped change people’s attitude towards the sector, which has spent so long being excluded from ESG portfolios.
Currently, just two ETFs are tracking this theme, both of which launched last year.
However, HANetf’s Future of Defence UCITS ETF gets our pick based on its stronger start compared to its rival – the VanEcK Defense UCITS ETF (DFNS) – since its inception.
Tracking the EQM Future of Defence index, NATO also comes in cheaper with a TER of 0.49% versus 0.55% for DFNS.
iShares Essential Metals Producers UCITS ETF (METL)
Clean energy and transition themes faced a tough year in 2023 as interest rates rose and oversupply in sectors such as solar meant prices plummeted.
However, one space where oversupply is not an issue is in the mining of important transition metals such as copper, lithium and cobalt.
Supply has remained constrained as geopolitical tensions close or delay bringing key mines online, according to Moufti.
“You have good demand and restricted supply, meaning the elements are there for price rising that are set to benefit these mining companies,” he said.
“China is one big uncertainty, but at least it is a big consumer of these metals.”
One way to play this is via the iShares Essential Metals Producers UCITS ETF. Tracking the S&P Global Essential Metals Producers index, the ETF is one of the cheapest tracking the theme with a TER of 0.55%.
Franklin Future of Health and Wellness UCITS ETF (FRHW)
As was the case for much of last year, artificial intelligence will likely be the driving force of tech-related equities throughout 2024.
One of these could well be the healthcare innovation. The use of AI within the sector could help the industry manage its huge data load, allowing for a much more efficient use of its resources.
Elsewhere, the development of groundbreaking medications such as weight loss drugs has the power to drive returns in the sector over the next year.
“We have seen new obesity medications emerge as one of the most significant therapeutic trends,” BlackRock said in its Thematics Outlook 2024 report. “The potential for growth from healthcare against a backdrop of lower global economic growth is an attractive factor looking into 2024.”
One ETF that captures all these areas is Franklin Future of Health and Wellness UCITS ETF, which tracks the Solactive Sustainable Health and Wellness index and has a TER of 0.30%.
L&G Clean Water UCITS ETF (GLUG)
Water ETFs are coming off the back of a strong 2023 but many believe tailwinds remain for the theme.
In periods of uncertainty, driven by the rising interest rate environment, many water companies exhibit quality pricing power meaning they could show some resilience in current markets.
Added to this, global investment in water infrastructure is almost certain to pick up, particularly as climate challenges mount. The US is also set to introduce new legislation on water treatment which is also likely to significantly boost investment into the sector.
Here we have selected the L&G Clean Water UCITS ETF, which has returned 13.2% over the past year tracking the Solactive Clean Water index.
Like the rest of Legal & General Investment Management's thematic ETF range, GLUG is equally weighted which gives it a natural bias to small caps versus its competitors while also leaving it less reliant on the performance of a few names.
WisdomTree Cybersecurity UCITS ETF (CYSE)
Cyber security is another theme that has benefited hugely from the AI hype.
While one of the best-performing themes of last year the theme could well continue its momentum into 2024 as digital security risks for companies mount.
The Bank of America (BoA) selected cyber security as one of its top themes for 2024 but said a strong year for cyber stocks could favour the sector’s laggards.
The bank said IT budgets remain robust, while cloud transformation – driven by AI – has also massively boosted the sector.
The best-performing cyber ETF of 2023 was WisdomTree Cybersecurity UCITS ETF, returning 66.8%, and is also Europe’s cheapest with a TER of 0.45%.