Citi’s factor-focused ‘Global Theme Machine’ rounded off Q1 with a harsh reminder that not all themes are built equally, with its scoring revealing starkly different quantitative profiles for different thematic groups.
Only nine months after it started tracking the equally-weighted performance of different thematic ETF classes, Citi highlighted the favourable characteristics of more cyclicals-focused themes while ranking consumer-facing themes bottom of the pile.
Among the former, Citi pointed to buyback ETFs, agriculture and food innovation, nuclear energy and uranium, natural resources and cybersecurity as its top five ‘most attractive’ themes based on valuation, growth, price momentum, quality, low risk and earnings momentum inputs.
Top of the pile, buyback ETFs ranked first on quality and price momentum while agriculture and food innovation positioned in the top three themes for overall low risk and earnings momentum inputs.
Scott Chronert, global head of ETF research at Citi, said: “Buyback strategies screen most attractive in our most recent scoring of the thematic ETF landscape.
“This historically value-oriented theme can be used as a transition tool for investors moving from purer cyclical/value exposure, to more fundamentally defensive stances against a backdrop of uncertain macros and changing monetary policy. The buyback category has shown economic sensitivity in the past but it comes with a quality kicker.”
While the range of ETFs addressing buybacks and agriculture remains relatively small in Europe, it is interesting to see the nuclear and uranium theme finish top for earnings momentum and third for valuation inputs – especially considering no ETF has addressed this theme in Europe since the ETFS WNA Global Nuclear Energy GO UCITS ETF shut.
Citi’s recent inclusion of natural resources as an ETF theme might also raise some eyebrows, though it finished top for valuation scoring and third for price momentum.
Finally, cybersecurity rounded out the top five as the only thematic ETF class addressing a future megatrend. It ranked fifth for both price and earnings momentum, respectively.
On the flipside, travel and luxury spend, health and wellness, eCommerce, space and education fared worst against the quants-heavy scoring of Citi’s theme machine.
While there were a few exceptions, all five themes tended to rank outside of the top 20 on all six scoring metrics. Travel and luxury spend finished at the bottom of the pile, outside of the top thirty themes across all six comparisons.
The aggregate relative performance of the top five thematic ETF categories versus the bottom five was 1.27 between 14 July 2021 and 14 March 2022.
Over the same period, the MSCI ACWI returned negative 3% while the top five themes booked 8% gains and the bottom five themes fell 15%, according to Citi research.