Here are ETF themes and categories investors may want to consider in the second half of 2023

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U.S. stocks just closed out a historically robust first half of the year with flows into U.S. equity-related exchange-traded funds picking up steam in the second quarter. The rally has been primarily driven by the solid returns of tech sector highfliers, despite being clouded by numerous downside risks such as inflation, geopolitical tensions and recession concerns. 

Investors in exchange-traded funds rapidly took note of the growth potential for artificial intelligence (AI) and robotic-related ETFs that specifically target companies like Nvidia Corp.
NVDA,
+0.95%
which help build or benefit from AI applications. 

The Global X Robotics & Artificial Intelligence ETF
BOTZ,
+0.93%
has attracted inflows of over $662 million and jumped 36% so far in 2023, while Global X Artificial Intelligence & Technology ETF
AIQ,
+0.36%
recorded a total inflows of $221 million and advanced 37.1% year to date. Nvidia, which has gained over 187% in 2023, is their top holding, according to FactSet data. 

Ullal, in a phone interview, told MarketWatch that the biggest risk regarding the AI-related ETFs is that it is hard for investors to identify “who actually is going to win in the long term since the earliest movers are not always the biggest winners.” 

It is also hard for them to find “pure play” companies which focus on only one line of business, he said. “Sometimes investors end up holding companies like Alphabet Inc.
GOOGL,
-0.52%
and Meta Platforms
META,
-0.50%
with diversified businesses,” said Ullal. “It takes time for the space to mature [until] there’s enough stock in pure AI.” 

See: Retail investors keep chasing the stock market rally, rotating to EVs from AI: analysts

The ETF performance in the week ended Wednesday shows ETFs in the electric-vehicle (EV) sector started to outperform the AI-related funds after shares in several EV makers surged after reporting solid delivery numbers for the month and quarter ending June 30.

The First Trust Nasdaq Clean Edge Green Energy Index Fund
QCLN,
+2.98%,
the Invesco WilderHill Clean Energy ETF
PBW,
+3.46%
and the Global X Lithium & Battery Tech ETF
LIT,
+1.85%,
all recorded a weekly advance of over 5%. They were the top performers among over 800 ETFs that MarketWatch tracked in the past week, according to FactSet data. 

However, some EV-related ETFs haven’t attracted significant inflows. The First Trust Nasdaq Clean Edge Green Energy Index Fund saw outflows of $4.9 million in the week to Wednesday, while the Global X Lithium & Battery Tech ETF recorded a total outflows of $6 million over the same period, according to FactSet data. 

This is because ETF flows are mainly driven by allocation models and some models may be rebalanced only once a month or once a quarter, Ullal said. That’s why flows tend to lag performance by a few months, and it also takes time for investors to adjust to the performance in the ETF space and rotate into the sector, he told MarketWatch via phone. “We would expect flows to catch up in the second half.” 

See: Why BofA says to own this version of the S&P 500 in the second half of 2023

Ullal also pointed to equal-weight sector ETFs and small and medium-cap ETFs as opportunities for investors as the stock-market breadth will continue to broaden out in the second half of 2023. 

He also recommended ETFs which could take advantage of the idea of “reshoring and modifying multinational supply chains” as tensions between the U.S. and China escalate and China’s post-COVID economic recovery is still on hold. 

For example, the Pacer Industrial Real Estate ETF
INDS,
-0.46%
offers exposure to global developed market companies that generate revenue from real estate operations in the industrial sector, or the iShares MSCI Emerging Markets ex China ETF
EMXC,
+0.76%,
which invests in stocks from emerging markets countries excluding those from China.

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

…and the bad

New ETFs

• iM Global Partner and Berkshire Asset Management June 30 launched the iMGP Berkshire Dividend Growth Equity ETF
  BDVG,
  -0.23%,
  a new dividend growth ETF that invests in dividend-paying equity securities, with an emphasis on stocks that have a strong track record of paying dividends or that are expected to increase their dividends over time.

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