ETF Wrap: Tech, AI ETFs are soaring, but flows show investors holding back

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Investors in the market for exchange-traded funds have largely stepped to the sidelines during this year’s run-up of stocks linked to technology and artificial intelligence, according to CFRA Research’s Aniket Ullal.

Invesco QQQ Trust Series I
QQQ,
which tracks the Nasdaq-100 index
NDX,
has surged almost 42% so far this year through Thursday, FactSet data show.

Flows into the giant ETF—whose top holdings on Wednesday included so-called Big Tech stocks including Apple Inc.
AAPL,
+0.88%,
Microsoft Corp.,
MSFT,
+0.79%
Amazon.com Inc.
AMZN,
-0.09%,
Nvidia Corp.
NVDA,
+0.21%,
Meta Platforms Inc.
META,
+2.18%,
Tesla Inc.
TSLA,
+1.75%
and Alphabet Inc.
GOOGL,
+1.02%

GOOG,
+1.08%
— point to appetite for the fund over the past week after anemic demand over the first eight months of 2023.

But ETF investors still appear hesitant about tech, said Ullal, head of ETF data and analytics at CFRA Research, in a phone interview. 

The Vanguard Information Technology ETF
VGT,
which has $52 billion of assets under management, and Technology Select Sector SPDR Fund
XLK,
with $49 billion of assets, have each seen outflows over the past week through Wednesday as well as so far this year, according to FactSet data. 

While QQQ points to “signs of a possible turnaround in flows into tech,” that’s not a “definitive signal,” said Ullal. “The fact that VGT and XLK still have negative flows indicates there’s still some hesitation for investors.”

Some megacap companies held by Invesco QQQ Trust Series I, such as Amazon and Tesla, aren’t in the portfolios of the Vanguard Information Technology ETF and Technology Select Sector SPDR Fund, according to Ullal. While sometimes referred to as Big Tech, Amazon and Tesla belong to the S&P 500 index’s consumer-discretionary sector, FactSet data show.

“Investors like to include Amazon as part of the AI story in investing, but Amazon is not held in some of the more traditional tech ETFs,” said Ullal. “QQQ captures a lot of the stocks that investors tend to be interested in when they’re looking at tech innovation, AI and those kinds of trends.”

The Vanguard Information Technology ETF and Technology Select Sector SPDR Fund follow the Global Industry Classification Standard, or GICS, in selecting U.S. tech stocks, he said.

Meanwhile, shares of Amazon, the e-commerce company whose business operations also include cloud-computing services, have surged around 72% so far this year through Thursday, FactSet data show. Tesla’s stock has skyrocketed about 124% over the same period. 

The massive gains posted in 2023 by Invesco QQQ Trust Series I, which has around $206 billion of assets under management, have surpassed the large gains of the Vanguard Information Technology ETF and Technology Select Sector SPDR Fund. 

The Technology Select Sector SPDR Fund, which tracks an index of tech stocks in the U.S. large-cap stock benchmark S&P 500, has soared 38% this year, while the Vanguard Information Technology ETF, which invests in U.S. tech stocks both large and small, has climbed 36% so far in 2023, according to FactSet data.

As for investor demand, the Vanguard Information Technology ETF has seen $110 million of outflows over the past week through Wednesday, bringing its total withdrawals this year to about $1.1 billion, FactSet data show. And investors have pulled $232 million from the Technology Select Sector SPDR Fund in the past week through Wednesday, with its outflows this year totaling about $2 billion.

But demand for the Invesco QQQ Trust Series I has recently picked up.

The fund attracted $2.2 billion of net capital flows over the past week through Wednesday, after on Sept. 12 the ETF raked in $3.3 billion for its biggest daily inflow since March, FactSet data show. That brought its year-to-date flows to $3.8 billion, after seeing just $147 million of inflows this year through August.

A cheaper, less liquid version of the fund, the Invesco Nasdaq 100 ETF
QQQM,
tends to attract retail investors and financial advisers who may be more focused on a buy-and-hold investment strategy rather than the tactical trading strategies pursued by institutions, said Ullal. That fund, which trades under the ticker QQQM, has around $6 billion of inflows this year through Wednesday, FactSet data show.

Looking at QQQ and QQQM, which both track the Nasdaq-100 index, Ullal said “the flows were not as large as we would expect” this year given their returns.

Similarly, while the Global X Robotics & Artificial Intelligence ETF
BOTZ
has $638 million of inflows this year through Wednesday, Ullal said he would have anticipated more investor demand for the fund based on its performance. Shares of the ETF are up 25.5% so far this year through Thursday.

“Given the positive sentiment around AI,” said Ullal, “one would have expected flows to have been stronger.”

So far this month, shares of the Global X Robotics & Artificial Intelligence ETF are down 3.5% through Thursday. Invesco QQQ Trust Series I has slipped 0.2% over the same period, while the Vanguard Information Technology ETF has dropped 2.4% and the Technology Select Sector SPDR Fund has fallen 2%, FactSet data show.

Meanwhile, the recently launched BNY Mellon Innovators ETF, which began trading in May, is down 2.2% so far in September.

“This is a strategy that invests not just in technology, but in innovation-driven companies that we like to say are changing the way we live, work and play,” said Stephanie Pierce, chief executive  officer of Dreyfus, Mellon and Exchange-Traded Funds at BNY Mellon Investment Management, in a phone interview.

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

• Direxion said Sept. 13 that it launched a pair of single-stock ETFs designed for active traders seeking bearish or bullish bets on the daily performance of Nvidia Corp.
  NVDA,
  +0.21%.
  The new ETFs are the Direxion Daily NVDA Bull 1.5X Shares
  NVDU
  and Direxion Daily NVDA Bear 1X Shares
  NVDD.
  The funds are leveraged and inverse ETFs that are meant for “short-term trading purposes,” not buy-and-hold investments, according to the announcement.

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