Exchange Traded Funds conquer the market

In the current market environment, Exchange Traded Funds (ETFs), which are user-friendly, transparent and low-cost tools, have been systematically gaining market share at the expense of actively managed funds. Which, however, still hold 80% of the assets in the “Morningstar Equity Technology Sector” category.

In fact, the technology sector has been the real star of the longest market rally ever. Between 2009 and 2021, the MSCI World Information Technology index rose more than 650%, marking only two bad years in terms of returns, 2011 (-2.5%) and 2018 (-2.6%) and almost always beating the MSCI World, even tripling it in 2020. 

An Exchange Traded Fund, known as an ETF or in Italian as “exchange traded fund,” is a type of investment fund listed on the stock exchange, with limited liability for members who participate by buying and selling shares. ETFs have the distinction of being passively managed, as they link to a pre-existing stock index or the like. 

The situation of exchange traded funds within the market

Last year, with the arrival of the bear market the downturn was heavy: -31% versus -18% for the global stock market. As a result, assets under management by European ETFs exposed to the tech sector fell by as much as €8 billion, from €32 billion to €24 billion.

However, investors have not lost hope. In fact, during 2022, the Exchange Traded Fund category still managed to attract flows, recording modest but still positive net inflows of 854 million (in 2021 and 2022, net inflows had been 6.4 billion and 6.5 billion, respectively).

Also underscoring the resilience of tech replicants is the fact that in 2022, the category’s organic growth rate, which measures the percentage of flows based on initial assets, was 2.7%. 

This is more than decent when considering the performance of the stock market, albeit lower than the 5.2% organic growth rate marked by equity ETFs as a whole in 2022.

In addition, there are currently 84 technology sector equity ETFs listed on the Italian stock exchange. Of these, 25 were listed in 2022. Specifically, there are some that stand out in terms of assets under management as of 12 January 2023.

Among these standing out in terms of assets under management is the iShares Automation & Robotics UCITS ETF (RBOT), a physical replicant of the iSTOXX® FactSet Automation & Robotics Index, a benchmark composed of 159 companies that generate significant revenues from specific sectors associated with the development of automation and robotics. 

The top two constituents are currently the US-based semiconductor companies Lattice Semiconductor Corp (LSCC), which is active in semiconductors and specializes in the production of programmable electronic components, and Intuitive Surgical Inc (ISRG), which develops, manufactures and markets a robotic system for assisting minimally invasive surgery.

The L&G Cyber Security UCITS ETF (ISPY) fund follows. This is a fund exposed to a group of global companies that generate a substantial percentage of their revenues in the cybersecurity sector. 

Specifically, infrastructure providers that develop hardware and software to protect internal and external access to files, websites and networks, or companies that provide consulting and cybersecurity services. 

Morningstar’s ranking for the Exchange Traded Funds with the most clicks in the quarter

The ranking of Exchange Traded Funds with the most clicks by Morningstar readers during the fourth quarter confirms interest in core equity products, not to mention thematic ones. In addition, investors also seek inflation protection through high-dividend strategies high-yield bonds and gold.  

According to the recent ranking at the top of the Top 10 is the iShares Core MSCI World UCITS ETF, which is exposed to global equity markets. It is followed in second place by the iShares Global Clean Energy UCITS ETF, focused on the clean energy sector. Finally, the iShares Core S&P 500 UCITS ETF USD (Acc) (EUR) closes the podium.

In fourth position is the Invesco Physical Gold ETC (EUR), this is probably because gold has always been seen as a safe haven asset in times of great uncertainty. This is followed by a new entry: the SPDR® S&P US Dividend Aristocrats UCITS ETF Dis (EUR) and by the Vanguard FTSE All-World High Dividend Yield UCITS ETF USD Distributing (EUR). 

Indeed, high-dividend strategies are attractive in an environment of rising inflation eroding asset value, in addition to the fact that historically they tend to be better able to withstand volatility.

In seventh place is another global equity, the Vanguard FTSE All-World UCITS ETF USD Accumulation (EUR), followed by the Lyxor MSCI World Health Care TR UCITS ETF – C-EUR, a replicant of a representative basket of major pharmaceutical companies in developed countries.

Finally, the iShares € High Yield Corp Bond UCITS ETF EUR (Dist) closes the rankings, after a very complicated year and with most of the rate hikes perhaps behind them so investors may in fact be returning to bonds. 

Still, the L&G Hydrogen Economy UCITS ETF-USD Acc (EUR), which offers investors exposure to the long-term investment opportunities offered by the transition to a low-carbon, hydrogen-related economy. 

The difference between thematic and sector investments 

Regarding the difference between thematic and sector investments, it can generally be said that not all sector funds are thematic, while the opposite is almost always true. 

The technology sector is a good example, in that, according to Morningstar methodology, technology sub-funds to be included in the thematic investment universe must not simply invest in tech companies, but must explicitly target one or more specific themes, such as next-generation technologies.

So, out of the 84 ETFs belonging to the Technology Sector Equity category, there are 18 that Morningstar does not consider thematic investments. These include, for example, the Xtrackers MSCI World Information Technology UCITS ETF 1C (XDWT).

With regard to the other 66, however, we find three cases in which the ETF is included in the thematic universe by Morningstar analysts, but not in the group dedicated to the theme of technology. The Rize Education Tech and Digital Learning UCITS ETF A USD (LERN), for example, is assigned to social and education themes in particular.