NEW YORK, United States of America
Thematic tech is seeing big price declines, but most investors are not bailing out.
It’s been a horrible year for the formerly red-hot investment darling, “thematic tech” investing, a catch-all phrase for emerging tech sub-sectors like Cathie Wood’s Ark funds, clean energy, cybersecurity, cloud computing and 3D printing.
After rocketing up in 2020 and into early 2021, these funds have seen dramatic declines since mid-February when rising interest rates put a crimp in the more speculative sectors of the markets, including thematic tech.
Thematic tech sells off (from 52-week highs)
ARK Innovation (ARKK) 33%
Global X FinTech (FINX) 20%
Global X Lithium/Battery (LIT) 18%
Global X Cloud Computing (CLOU) 18%
Global X Video Games/Esports (HERO) 18%
Global X Social Media (SOCL) 18%
Global X Robotics/Artificial Intelligence (BOTZ) 12%
Global X Autonomous/Electric Vehicles (DRIV) 10%
Prices are down, but outflows have been modest
Yet a curious thing has happened — outflows have been relatively modest.
Jay Jacobs, head of research for GlobalX, which runs some of the most popular thematic ETFs, said that on average, outflows from his thematic tech funds have been “zero to 5%,” small considering all have seen double-digit price declines since February.
This is true even for Wood’s flagship ARK Innovation Fund, off 34% from its historic high in February, but with only modest outflows of about $1 billion, which is about 5% of the fund.
Why many investors are sticking with tech
Many retail investors, who tend to have a short-term focus based on momentum, did indeed bail when prices started dropping.
But Jacobs insists the core holders of his fund — and many other thematic tech funds — are not retail investors with weak hands.
“The hands seem to be stronger than the market may suggest,” he told me. “Over 50% of the flows last year [in our funds] came from financial intermediaries, like advisors managing money for clients, 15% from institutions like pensions or endowments, and only one-third from retail. … So it’s not true that the only people buying these are retail investors with weak hands. People still believe in the long-term thesis and are not pulling money out.”
Kim Arthur, president and CEO of Main Management, which specializes in ETF holdings, agrees that there are more “strong hands” in these funds than investors realize.
He runs the Thematic Innovation ETF (TMAT), a collection of thematic ETFs that mixes several themes, including clean energy, genomic research, fintech and online retail.
“Ninety-nine percent of the Thematic Innovation ETF is owned by professionals, we have virtually no retail,” he said. “We have seen no outflows.”
The difference between retail and professional
Kim explained that professionals own these stocks for entirely different reasons than the momentum-driven short-term retail investors: “The professionals who bought this bought it for the future and are willing to wait it out.”
Nicholas Colas, who runs DataTrek, a quantitative driven stock research firm, agreed, and explains why that investor base is so patient.
“This investor base is sophisticated,” he said.
He noted that many tech investors invest based on a J-curve, which means they are expecting losses for the first several years, followed by expectations of significant gains.
“So they are expecting losses in the first three or so years, but then there are profits in years 4-10. You have to buy in during year one, and put up with the volatility for the next few years,” Colas said.
Arthur said investors in his funds were already starting to see a better picture. In February, his Thematic Innovation ETF was trading at 36 times 2021 estimates, which he described as “pretty rich.”
Today, four months later, it is trading at 22 times 2022 estimates, a far more reasonable multiple (most analysts are now working off 2022 estimates). “So it is very easy for these stocks to grow into their multiples, and the advisors have not panicked,” he said.
Difference between price declines and fund outflows
The bottom line, Colas said, is there is considerable confusion about the difference between price declines and outflows. They are not the same.
“Fund flows do not determine price action,” he said. “Fundamentals and sentiment determine price action. You can’t follow flows and expect to predict the price. It doesn’t indicate they are giving up or that the asset class has no future.”
As an example, Colas points to equity flows. While there have been inflows into equity ETFs, overall flows for stocks (mutual funds) have been negative for years, “yet the market did just fine.”
While price declines are certainly not welcome by investors, for people like Jacobs it has not resulted in dramatic selling: “We don’t sell holdings unless we have outflows, and for the most part we are not seeing dramatic outflows,” he reiterated.
“Until you see real outflows in addition to the price declines, it’s just noise,” Colas said.