Hot tech stock ETFs are sitting on big gains. Is it time to sell?

Artificial intelligence has emerged as a major investment trend in the market, attracting a significant influx of assets into thematic exchange-traded funds (ETFs) that allow retail investors to capitalize on technological advancements. However, experts caution that while these funds can experience rapid growth, they are also prone to sudden declines. This serves as a crucial reminder for investors, especially as tech stocks face increased volatility and lead the market lower in recent days. The Nasdaq, in particular, has been teetering on the edge of falling below its 50-day moving average for the first time since the April downturn, with three consecutive losing sessions reported.

According to Mike Akins, a founding partner at research firm ETF Action, there are nearly 400 thematic ETFs that cover various trends, with some experiencing significant gains while others have seen losses. Thematic ETFs focus on specific sectors or technologies, which can lead to strong returns during favorable market conditions. However, they can also be highly volatile and susceptible to shifts in investor sentiment.

One of the most popular thematic categories is disruptive technology, which includes artificial intelligence. Akins highlighted that AI-focused ETFs have attracted nearly $20 billion in flows year to date, with a substantial portion of that investment going into funds with “AI” in their name. Notable examples include the Global X Artificial Intelligence & Technology ETF (AIQ) and the Robotics & Artificial Intelligence ETF (BOTZ), both of which have accumulated billions in assets under management.

Thematic ETFs require thorough research due to the inherent tracking error associated with investing in specific themes rather than broad market indexes. Akins pointed out that among the 18 AI-focused ETFs classified by ETF Action, there is a performance spread of 60% this year. This underscores the importance of understanding the risks and potential rewards of thematic investing.

Despite the recent market turbulence, thematic investing remains a viable strategy for investors who are willing to weather short-term fluctuations. Akins emphasized the importance of seizing opportunities in the market, as themes can experience rapid growth before potentially losing momentum. It is crucial for investors to stay informed and consider adjusting their allocations based on market conditions.

The proliferation of ETFs in recent years has provided investors with a diverse array of opportunities, but it has also introduced additional risks. While thematic investing can offer substantial returns, it is essential for investors to conduct thorough due diligence and monitor their investments closely. By staying informed and remaining adaptable, investors can navigate the evolving landscape of thematic ETFs and capitalize on emerging trends in the market.