Industry Updates

Thematic ETFs outperform as banks get pummelled in Q1

The impact of rising interest rates has varied dramatically across asset classes

Theo Andrew

Silicon Valley Bank SVB downward chart

Following 12 months of turmoil for thematic and crypto-related ETFs in 2022, the first quarter of this year marked a dramatic turnaround for the asset class as volatility reigned.

Blockchain ETFs dominated the performance charts following an electric start to the year as investors turned risk-on on the likelihood of a ‘soft-landing’ and abating interest rate rises.

Highlighting this, digital asset market drivers such as cryptocurrencies have been on a tear this year, with bitcoin up 66.2% while ethereum rose 47% over the same period.

Growth-orientated thematic ETFs also benefitted from investor belief the Federal Reserve would slow its interest rate hiking cycle, with themes such as the metaverse and semiconductors posting a strong start to the year.

On the reverse side of the coin, the current banking crisis in the US and Europe sent financial ETFs plummeting as fears of contagion rippled through markets.

The collapse of the 18th largest bank in the US Silicon Valley Bank (SVB) was followed by UBS’s acquisition of rival Credit Suisse after the bank’s largest investor lost confidence in the lender.

Likewise, some of the best-performing ETFs in 2022 have fallen off dramatically in Q1 including commodities and single-country ETFs.

The winners of Q1

Topping the performance charts is the Global X Blockchain UCITS ETF (BKCG) which has returned 71.4% in the three months to the end of March, according to data from justETF. This was closely followed by the VanEck Crypto and Blockchain Innovators UCITS ETF (DAGB) which soared 70.9%.

The sector has sailed through the market volatility relatively unscathed, even despite the collapse of crypto lender Silvergate Bank and SVB, primarily on the notion the Fed would slow down its rate hiking cycle on the bank of cracks emerging in the banking sector.

Also posting a strong Q1, the Grayscale Future of Finance UCITS ETF (GFOP) and the ETC Group Digital Assets & Blockchain Equity UCITS ETF (KOIP) jumped 39.7% and 38%, respectively.

Despite the uptick in performance, BCKG, DAGB and KOIP are still down 68.7%, 70.2% and 61% on a 12-month rolling basis.

Elsewhere, semiconductor ETFs were also among the best-performing in the first quarter.

The Lyxor MSCI Semiconductor UCITS ETF (SEMG) posted returns of 31.7% over the first three months of the year, followed by the VanEck Semiconductor UCITS ETF (SMGB) and the HSBC Nasdaq Global Semiconductor UCITS ETF (HNSS) with returns of 29.7% and 28.2%, respectively.

According to Saxo Bank, turmoil in the banking sector has helped lift the tech sector as investors turn to “safe havens” trades.

“This [banking sector fears] has lifted technology stocks with semiconductor stocks rising 11% in March followed by strong performance among industry groups such as media and entertainment, technology hardware, and software,” it said.

“The excitement over ChatGPT 4 has also helped on risk sentiment in technology stocks.”

However, the bank is cautious about the future performance of the sector, noting their strong year-to-date gains and their high price-to-earnings ratio meaning they could be in line for a haircut.

In a similar vein, metaverse ETFs also made strong gains over the quarter, with the Franklin Metaverse UCITS ETF (METU), the ETC Group Global Metaverse UCITS ETF (METP) and the L&G Metaverse ESG Exclusions UCITS ETF (MTVG) returning 29.7%, 25.9% and 25.3%, respectively.

Bank ETFs get pummelled

In a month when many were anticipating a replay of the Global Financial Crisis, the first notable impact of the sharpest rate hiking cycle in decades.

Following the downfall of SVB, investors’ concern over the health of US regional bank balance sheets spread with regulators forced to step in a bid to stem the risk of contagion.

As a result, the iShares S&P US Banks UCITS ETF (BNKS) was one of the worst performing over the quarter, falling 15.6% alone in the week of SVB’s collapse, taking its losses to 20.7% for the quarter.

In Europe, the controversial decision by Swiss regulator FINMA to wipe out $17bn of Credit Suisse’s AT1 debt to zero as part of the UBS deal sent the market into turmoil, taking ETFs with it.

The Invesco AT1 Capital Bond UCITS ETF (AT1) and the WisdomTree AT1 Coco Bond UCITS ETF (COCB) both fell 9.1% over the quarter despite rallying 7.4% each in the week to 3 April.

Interestingly, European banks are back in the black following a tumultuous March.

For example, the Lyxor STOXX Europe 600 Banks UCITS ETF (BNK) is up 4.4% since the turn of the year, despite falling 12.1% over March.

Commodity ETFs saw some of the 2022 outperformance reverse in Q1, with the iShares Oil & Gas Exploration & Production UCITS ETF (SPOG) and the Amundi Bloomberg Equal-weight Commodity ex-Agriculture UCITS ETF (CRBL) dropping 8.7% and 9.2%, respectively.

Also reversing its 2022 trend is Turkey. The Lyxor MSCI Turkey UCITS ETF (TURL) returned 89% in 2022 and was the best-performing ETF in Europe over the period.

However, the ETF has struggled so far this year, returning -9.7%, following the earthquake which forced the Borsa Istanbul to trigger a market-wide circuit breaker as equities slid.

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