US exchanges now consist of more exchange-traded funds (ETFs) than individually listed stocks for the first time ever. There are now more than 4,300 ETFs, while the number of listed company stocks hovers under 4,200, according to data compiled by Morningstar.
As investor appetite for ETFs grows, Hightower Advisors chief investment strategist and portfolio manager Stephanie Link tells InvestmentNews that cybersecurity, animal care, and energy stand out as three ETF themes that advisors should look to invest in.
“[Cybersecurity] is probably my favorite theme for the next 10 years. And I almost encourage advisors to focus on an ETF on this theme, because the stocks are so volatile,” says Link. “I think AI is going to create more need for cybersecurity.”
Amplify’s HACK was mentioned by Link as an attractive cybersecurity ETF, given its exposure to firms such as Broadcom, CrowdStrike, Cisco, and Palo Alto Networks. “I think you’re going to see massive consolidation in the industry − there are 4,000 cybersecurity companies that are public and private in the world, and I think that's going to dwindle down to much, much less, and the big five are going to get bigger and bigger,” says Link.
“When you think about what could really bring down a country or bring down an organization, it’s the threat to data, the threat to their systems. I think people need to pay more attention to cybersecurity,” says Themes ETFs chief revenue officer, Paul Marino. “Even in lean times, when the market wasn’t doing well, we weren't hitting new highs − cybersecurity always has a place. Because when organizations cut spending, they rarely cut to cybersecurity. They can't afford to do that.”
Just as the rise of artificial intelligence (AI) leads to greater need for cybersecurity, booming AI data centers also fuel the need for various energy sources to support that infrastructure. “If you believe in AI, you have data centers, you need data centers, you need a grid upgrade. We haven’t had a grid upgrade in 50 years,” says Link. “The ETF of GRID, I have a lot of advisors that own that.”
Philip Blancato, who serves as both the chief market strategist at Osaic and CEO of Ladenburg Thalmann Asset Management, highlights the “electrification of America” as a key ETF investing theme.
“Buy high-quality utility names that are in the process of having a multi-diversified energy process. They’re using gas, using nuclear, and then they’re retrofitting their grids to become more efficient. And you also want that same utility to have data centers being built in their area,” says Blancato, who references the Southern US as being a hot spot for building data centers.
“Datacenter ETFs specifically seem to be heavy in data center REITs and cellphone tower stocks, which are both mature and interest-rate dependent,” adds Rob Haugen, chief investment officer of River1 Asset Management. “We think the supply and demand dynamic for energy is about to be heavily tilted towards demand. Given energy is a slow process to add, we think all energy sources will have to be used and likely do well.”
Haugen, who also serves as CIO for the family office of the Wisconsin-based energy infrastructure firm Michels Corporation, is most skeptical of nuclear energy as an energy investment.
“Nuclear is very hot as a potential solution,” he says, “but until we see the ability to build it quickly and affordably, we aren’t going to give it as much credit as the best solution like the public stock market is clearly doing.”
Advisors looking to diversify beyond the technology sector could look to animal healthcare ETFs. Link recommends the ProShares Pet Care ETF (PAWZ) to capitalize on society’s growing love affair for our furry friends.
“It’s great exposure because it’s health and wellness, but it’s also food and it’s also clothing so it’s a nice diversification,” Link says of PAWZ holdings. “I think animal health is going to be such an incredible winner over the long term, because we’re going to spend $150 billion a year on our pets between now and 2030.”
Running parallel to these thematic ETF demands is the growth of active ETFs, which for the first time started outnumbering passive US-listed funds as of June. The number of active ETFs has more than doubled in the past five years, from just 23 percent in 2020.
“Active ETFs continue to grow significantly faster than the broader ETF market, with just under 40 percent of YTD flows into active ETFs, despite being only about 10 percent of the total ETF AUM,” says Dan Aronson, managing director, ETF client product specialist at Janus Henderson.
“In general, we have seen RIAs more willing to adopt active ETF strategies in areas such as fixed income and small caps,” Aronson says.
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