Are All Thematic ETFs Overvalued? No, Not Even in AI

As
the
chart
below
shows,
stocks
in
the
Gold-rated
L&G
Artificial
Intelligence
ETF
are
on
average
fairly
valued,
WisdomTree
Art
Intelligence
ETF,
rated
Bronze,
is
slightly
undervalued
and
Xtrackers
AI
&
Big
Data
ETF,
rated
Silver,
is
slightly
overvalued.

There
is
some
overlap
here,
with
both
L&G
Artificial
Intelligence
and
Xtrackers
AI
weighting
Nvidia
[NVDA],
Microsoft
(MSFT)
and
Alphabet
(GOOGL)
heavily.
The
WisdomTree
fund
holds
a
completely
different
set
of
stocks,
with
Micron
Technology
(MU)
the
biggest
weighting.

Are
Thematic
ETFs
Overvalued
or
Undervalued?

More
undervalued
thematic
ETFs
can
be
found
outside
the
AI
space.
Popular
investment
themes,
such
as
those
focused
on
the
climate
transition,
have
been
victims
of
the
hype
cycle
in
recent
years,
posting
periods
of
strong
outperformance
followed
by
underperformance–
especially
since
central
banks
began
to
raise
rates.

AI,
automation
and
robotics
in
the
overvalued
cohort,
as
well
as
defence,
as
geopolitical
uncertainty
is
filling
the
order
books
of
weapons
makers.

At
the
other
end
of
the
table,
a
China
Internet
ETF
is
the
most
undervalued
among
the
largest
ETFs
after
slower
economic
growth
and
regulatory
crackdowns
in
China
weighed
on
the
sector.
Funds
exposed
to
EV
batteries
have
struggled
recently
because
of
concerns
about
the
speed
of
EV
adoption
in
Europe,
leaving
L&G’s
Battery
Value
Chain
ETF
among
the
most
undervalued. 

UNDERVALUED
STOCK
ETFS

KraneShares
CSI
China
Internet
ETF
•
Medalist
Rating:
Bronze
•
Expense
Ratio:
0.75%
•
Theme:
Internet

The
€4.9
billion
KraneShares
CSI
China
Internet
ETF
(KWBP)
fell
13.97%
over
the
past
year.
The
loss
on
the
passively
managed
fund
edged
out
the
17.99%
loss
on
the
average
fund
in
the
China
region
category.
Year
to
date,
the
KraneShares
fund
is
up
0.04%,
while
the
average
fund
in
its
category
is
down
0.84%.

L&G
Battery
Value-Chain
ETF
•
Medalist
Rating:
None
•
Expense
Ratio:
0.49%
•
Theme:
Battery
Technology

Over
the
past
year,
the
passively
managed
L&G
Battery
Value-Chain
ETF
(BATT),
which
holds
€645
million,
fell
1.33%.
It
has
climbed
4.5%
year
to
date.
The
fund
launched
in
January
2018.

iShares
Electric
Vehicles
and
Driving
Technology
ETF
•
Medalist
Rating:
Gold
•
Expense
Ratio:
0.40%
•
Theme:
Next
Gen
Auto

The
passively
managed
iShares
Electric
Vehicles
and
Driving
Technology
ETF
(ECAR)
ended
the
past
year
up
9.39%,
underperforming
the
average
fund
in
the
equity
technology
category,
which
rose
29.16%.
The
€598
million
fund
has
gained
5.48%
year
to
date,
while
the
average
fund
in
its
category
is
up
10.04%.

OVERVALUED
STOCK
ETFS

VanEck
Defense
ETF
•
Medalist
Rating:
Bronze
•
Expense
Ratio:
0.55%
•
Theme:
Security

Over
the
past
year,
the
passively
managed
VanEck
Defense
ETF
(DFNS)
rose
52.97%,
while
the
average
equity
industrial
materials
fund
gained
16.75%.
The
€537.6
million
fund
has
climbed
24.13%
year
to
date,
outperforming
the
average
fund
in
its
category,
which
rose
7.2%.

First
Trust
Cloud
Computing
ETF
•
Medalist
Rating:
Bronze
•
Expense
Ratio:
0.60%
•
Theme:
Cloud
Computing

The
passively
managed
First
Trust
Cloud
Computing
UCITS
ETF
(SKYU)
ended
the
past
year
up
43.7%,
outperforming
the
average
fund
in
the
equity
technology
category,
which
rose
29.16%.
The
€323.7
million
fund
has
gained
11.62%
year
to
date,
while
the
average
fund
in
its
category
is
up
10.04%.

Xtrackers
AI
&
Big
Data
ETF
•
Medalist
Rating:
Silver
•
Expense
Ratio:
0.35%
•
Theme:
Artificial
Intelligence

Over
the
past
year,
the
passively
managed
Xtrackers
Artificial
Intelligence
&
Big
Data
ETF
(XAIX)
rose
55.27%,
while
the
average
equity
technology
fund
gained
29.16%.
The
€2.7
billion
fund
has
climbed
15.78%
year
to
date,
outperforming
the
average
fund
in
its
category,
which
rose
10.04%

How
Risky
Are
Thematic
Funds?

Investing
in
a
theme
is
an
attempt
to
capitalise
on
short-
or
long-term
trends
by
grouping
investments
around
ideas.
Whatever
you
think
will
be
the
“next
big
thing”,
from
robotics
to
space
travel,
will
be
catered
to
by
a
thematic
ETF.
But
the
line
between
sectors
and
themes
can
be
blurry,
especially
as
sector
definitions
have
drifted
through
time.
This
is
especially
true
of
“tech”,
which
has
splintered
into
many
different
sub-themes.
A
full
analysis
can
be
found
in
our
article,
“What
is
Thematic
Investing?

“Many,
if
not
all,
thematic
funds
are
risky
by
design,”
Morningstar
fund
analyst
Kenneth
Lamont
said.
“They’re
designed
to
target
very
specific
risk
and
return
drivers.
And
that
means
they’re
often
highly
concentrated
baskets
of
stocks
and
therefore
highly
volatile.
And
every
investor
in
thematics
must
really
understand
that
before
they
invest.”

Methodology
for
Thematic
ETFs

Using
Morningstar
Direct
data,
we’ve
used
the
biggest
ETFs
in
Europe
by
market
capitalisation
to
represent
their
respective
themes.
We’ve
looked
at
the
ETFs’
underlying
holdings
and
what
the
price/fair
value
of
each
is.
A
weighted
average
of
each
stock.

Other
ETFs
in
that
particular
theme
may
screen
as
undervalued,
overvalued
or
fairly
valued.
Price
data
is
at
month-end.
The
screen
includes
a
mixture
of
quantitative
and
qualitative
ratings.

Fair
value
estimates
inform
investors
of
the
long-term
intrinsic
value
of
a
stock,
helping
them
look
beyond
the
current
stock
price.
Morningstar
calculates
a
company’s
price
estimate
based
on
the
amount
of
cash
it
believes
the
company
will
generate
in
the
future.
In
determining
this
estimate,
Morningstar
also
takes
into
account
the
predictability
of
the
company’s
future
cash
flows
(uncertainty
index).

The
price/fair
value
does
not
take
into
account
the
cost
of
buying
ETFs
via
an
investment
platform
or
ongoing
charges.

As
part
of
our
mission
to
put
more
information
into
the
hands
of
investors,
this
article
was
partially
generated
by
Wordsmith,
an
automated
smart-text
platform,
using
Morningstar’s
data.
Written
and
edited
by
James
Gard,
Sunniva
Kolostyak
and
Fernando
Luque.

“Investing
in
a
theme
is
an
attempt
to
capitalise
on
short-
or
long-term
trends
by
grouping
investments
around
ideas.Whatever
you
think
will
be
the
“next
big
thing”,
from
robotics
to
space
travel,
will
be
catered
to
by
a
thematic
ETF.
But
the
line
between
sectors
and
themes
can
be
blurry,
especially
as
sector
definitions
have
drifted
through
time.
This
is
especially
true
of
“tech”,
which
has
splintered
into
many
different
sub-themes.
A
full
analysis
can
be
found
in
our
article,
“What
is
Thematic
Investing?“

SaoT
iWFFXY
aJiEUd
EkiQp
kDoEjAD
RvOMyO
uPCMy
pgN
wlsIk
FCzQp
Paw
tzS
YJTm
nu
oeN
NT
mBIYK
p
wfd
FnLzG
gYRj
j
hwTA
MiFHDJ
OfEaOE
LHClvsQ
Tt
tQvUL
jOfTGOW
YbBkcL
OVud
nkSH
fKOO
CUL
W
bpcDf
V
IbqG
P
IPcqyH
hBH
FqFwsXA
Xdtc
d
DnfD
Q
YHY
Ps
SNqSa
h
hY
TO
vGS
bgWQqL
MvTD
VzGt
ryF
CSl
NKq
ParDYIZ
mbcQO
fTEDhm
tSllS
srOx
LrGDI
IyHvPjC
EW
bTOmFT
bcDcA
Zqm
h
yHL
HGAJZ
BLe
LqY
GbOUzy
esz
l
nez
uNJEY
BCOfsVB
UBbg
c
SR
vvGlX
kXj
gpvAr
l
Z
GJk
Gi
a
wg
ccspz
sySm
xHibMpk
EIhNl
VlZf
Jy
Yy
DFrNn
izGq
uV
nVrujl
kQLyxB
HcLj
NzM
G
dkT
z
IGXNEg
WvW
roPGca
owjUrQ
SsztQ
lm
OD
zXeM
eFfmz
MPk