Is investors’ love affair with thematic ETFs officially over?

investmentnews.com:

After booming in the anything-goes pandemic era, a once-fashionable investment strategy is falling out of favor anew, hitting some niche ETF providers along the way.

Investors have already yanked nearly $4 billion so far this year from exchange-traded funds investing in themes like clean energy and cloud computing, after withdrawing $4.6 billion from such funds as a whole in 2023, according to Bloomberg Intelligence.

Thematic allocations were all the rage during the stay-at-home trading boom three years ago, when interest rates were at historic lows. Now money managers can earn nearly 5% by simply parking their money into cash-like instruments, while demand for market-leading growth companies is being met by Big Tech funds like QQQ, up more than 8% this year alone.

All that’s diminishing the appeal for often-unprofitable companies that ride disruptive technologies of tomorrow — many of which make up thematic portfolios — while forcing specialist providers to shutter funds or retool their offerings. Defiance ETFs has culled nearly half of its lineup since it was founded in 2018, according to Bloomberg Intelligence. Global X, earlier this year, liquidated around 20% of its suite. First Trust’s 29 thematic ETFs have garnered $55 million this year, compared to nearly $2.3 billion for the whole of 2021.

“For many of these thematic ETFs — because they’re high growth, because they’re scaling, because they’re made up of more unprofitable companies than just a market index — I do think rates have a bigger impact, for better or for worse,” said Ryan Issakainen, First Trust’s senior vice president and ETF strategist.

The market had expected the Federal Reserve to cut rates more aggressively than now seems likely, leading to a