AI funds dominate European thematic ETF flows

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Artificial intelligence-focused and big data funds represented more than half of inflows into European thematic exchange traded funds this year, according to data from Morningstar.

The category attracted net inflows of €510mn in the six months to the end of June, after posting €60mn in outflows last year. The inflows represent 53 per cent of the €960mn brought in by all thematic ETFs in Europe.

The growing interest in AI has also been seen in open-ended mutual funds, albeit to a lesser extent, with the AI and big data theme the third best-selling with €220m of inflows.

This came despite thematic mutual funds and ETFs as a whole having outflows of €510mn, after posting inflows of €1.3bn last year and €101bn in 2021, according to the data.

Kenneth Lamont, senior manager research analyst for passive strategies at Morningstar, said AI and big data had arguably been the main theme animating global equity markets this year.

“The unprecedented mass adoption of generative AI solutions such as ChatGPT has rippled through markets and benefited companies connected with that theme,” he said.

US technology company Nvidia, which dominates the market for chips used in AI systems, had more than tripled in value since the turn of the year, Lamont added.

“This new enthusiasm for what is a relatively mature theme is reflected in the considerable net inflows into thematic ETFs this year,” he said. “Few would argue that generative AI is likely to transform our lives to one degree or another, but exactly who the true winners of this change will be remains far from certain.”

However, he argued that the risks associated with picking a single winner could be mitigated by buying a basket of stocks exposed to that theme, in the form of an ETF.

The top nine performing thematic funds in the first half of this year were focused on the theme of technological shifts, according to a report by WisdomTree.

“It is likely these themes benefited from the rise of generative AI and associated tailwinds,” the report said.

Despite the growth in artificial intelligence ETF flows, overall thematic ETF flows have fallen this year.

Ralph Williams, associate director at Broadridge, said thematic ETFs had “lost some of their shine” when interest rates entered their “hiking cycle”.

“High growth stocks, which are sensitive to interest rate rises, constituted a number of key holdings [in thematic ETFs],” Williams said.

“Appetite has also been undermined by reduced [environmental, social and governance] performance, greenwashing fears and regulatory uncertainty,” he added.

He argued the previous success of thematic ETFs was partly due to investors taking advantage of pandemic-related themes, most obviously in the technology, lifestyle and medical sectors.

“Underlying everything, however, was the simultaneous 2021 surge in ESG buying, which boosted both explicit ESG and non-explicit ESG themes, thanks to the strong overlap between responsible investing and thematic outlooks,” he said.

Meanwhile, traditional mutual funds continue to dominate the European thematic funds arena, accounting for 90 per cent of assets, according to Morningstar data.

“Unlike in the US, where thematic ETFs dominate, thematics in Europe remain a traditionally actively managed story,” Lamont said.

The bulk of 2021 and 2022 thematic sales went into open-ended mutual funds, while 2023 outflows are “marginal” compared with previous inflows, according to Broadridge data.

“ETFs have held up better, while seeing lower initial flows,” Williams said.

“In aggregate, though, the longevity argument certainly has legs — we have yet to see anything resembling a real sell-off,” he said.

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at igniteseurope.com.